RHB Research keeps neutral call on plantations

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KUALA LUMPUR: RHB Research is maintaining its Neutral recommendation on the plantation sector with an Outperform on CBIP, Market Perform on Sime Darby.In a research note issued on April 6, the research house also said it had an Underperform on IOI Corp, KL Kepong, Asiatic and IJM Plantations. “Although our fundamental view of the plantation sector remains a Neutral, we believe that in this volatile market, trading is the key strategy for the highly weighted plantation sector,” it said. RHB Research said it believed that of late, the volatilities in crude oil prices as well as other soft commodity prices are not necessarily all attributable to fundamental industry changes or developments. It added financial demand had once again started to play a role in price movements of commodities, as risk appetite increases and builds up momentum. On the fundamental front, while it believed that the second half of this year (2H09) could see price weakness for crude palm oil (CPO) in particular, due to the commencement of the peak production period in both Malaysia and Indonesia, we believe part of this effect may be offset by the strength of soyoil prices, supported by supply shortages in South America. The research house also projected the US dollar should start weakening by the fourth quarter 4Q09 and this would also help to offset some of the impact of the peak production period. “We would be looking at revising our CPO price assumptions with an upward bias soon, to take these factors into account,” it said.RHB Research said from a trading perspective, there were two ways to gauge entry and exit strategies for the sector - by monitoring share prices versus CPO price movements and by working out what the share price of each company should be (assuming our target valuation methodology is correct) based on CPO rices. Based on these two monitors, it concluded that currently,RHB Research said currently, there were trading buy opportunities for IOI Corp, Sime Darby, Asiatic and IJM Plantations. However, main risks include a significant change in crude oil price trend; weather abnormalities resulting in an over- or under-supply of vegetable oils and also increased emphasis on implementing global biofuel mandates and trans-fat policies. Other factors were significant changes in trade policies of vegetable oil importing or exporting countries; and a faster- or slower-than-expected global economic recovery."We believe the current strategy would be to buy stocks which have fallen behind CPO prices and vice versa. As such, based on current CPO price, most of the stocks under our coverage are trading at or below current CPO price levels, with the exception of KL Kepong.It said IOI Corp’s share price should effectively be around RM4.60, which is still at a 13.3% premium to current price levels while  Sime Darby’s share price should effectively be around RM7.10, which is still at a 21.4% premium to current rice levels.It added Asiatic’s share price should effectively be around RM5.00, which was still at an 11.1% premium to current price levels and IJM Plantations’ share price should effectively be around RM2.40, which was still at a 9.6% premium to current price levels.As for KLK, it said the share price should effectively be around RM10.80, which wais at current price levels.