Potential earnings upgrade for planters

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MACRO indicators are pointing towards a better showing by the Malaysian palm oil sector this year. This has prompted expectations that the market would price in higher earnings among plantation players against a backdrop of lower production cost, thanks to cheaper fertilisers.

Lower palm oil stock levels in the country, the anticipation of less output of rival crop soybean and higher crude oil prices are several key drivers which could spur crude palm oil (CPO) prices to RM2,500 a tonne by mid-2009, according to analysts.

“Consensus estimates have always lagged CPO price movements in the past. With CPO prices recovering substantially from its lows, we believe consensus earnings are likely to lag again, especially, if prices can maintain its upward momentum.

“Hence, we believe there is a likelihood of earnings upgrades in the following months,” KAF-Seagroatt & Campbell Securities wrote in a note.

Latest updates by the Malaysian Palm Oil Board showed that local palm oil stockpiles fell for the fourth consecutive month to 1.36 million tonnes in March 2009, a 13.4% decline from the 1.57 million tonnes a month earlier.

The drop was due to strong exports and domestic consumption, against a backdrop of lower production levels.

Across the globe, soybean output has been curbed by a drought in South America. Updates by the US Department of Agriculture indicated that soybean production in Argentina could fall 9.3% to 39 million tonnes in the current  season.

Malaysian CPO futures have risen significantly to some RM2,400 a tonne this month compared with about RM1,500 a tonne in December 2008.

As of yesterday, the Kuala Lumpur Plantation Index had gained 18.87%, surpassing the Kuala Lumpur Composite Index’s 9.64% advance.

“We had previously argued that the demand-supply fundamentals between crude oil and edible oils are very different, and the relationship should grow weaker over time.

“However, should crude oil prices strengthen, it could revive interest in biofuel development, and would provide further price support for edible oil prices, more so, for CPO given its more competitive pricing,” said KAF which rated the local palm oil sector overweight.

Crude oil prices for May 2009 rose 75 cents to US$50 a barrel at the New York  Mercantile Exchange as at 4.27pm yesterday.

Investors have been selective when it comes to plantation counters. KAF said the more established and better managed planters had hogged the limelight over the past few months.

The wide disparity in share price performance among plantation firms could be due to investors’ cautious sentiments on the fundamentals of palm oil, whose demand might be curbed should food production slows.

“However, we think if CPO price can sustain its upward momentum, investors’ attention should shift to some of the laggards, especially, when valuation gaps are widening,” said KAF whose recommendations include Asiatic Development Bhd, Kulim (M) Bhd and PPB Group Bhd.

This article appeared in The Edge Financial Daily, April 17, 2009.