The CPO third-month contract, the most actively traded on the Bursa Malaysia Derivatives Exchange, declined by close to 40% from the peak of RM2,747 per tonne in May as it fell below RM2,000 a tonne in intra-day trade early this month. The price of palm oil futures fell as production and stock levels climbed in Malaysia.
Despite the drop, share prices of Sime Darby Bhd, IOI Corp Bhd (IOI) and Kuala Lumpur Kepong Bhd (KLK) held on tight to the upward momentum, moving in the opposite direction from CPO futures. Over the last two weeks, as CPO prices recovered to close the week at RM2,122 per tonne, plantation stocks climbed even higher, helping to push up the FBM KLCI. Sime Darby, IOI, KLK and PPB Group Bhd make up 21.1% of the index.
What is the reason for the disconnect between CPO prices and stock prices? Is the market expecting stellar results from the plantation counters or is it taking a bullish view on CPO prices?
Teo Meei Hern, an institutional dealer at RHB Investment Bank Bhd, believes the performance of plantation stocks may be attributed to the launch of a new fund by Permodalan Nasional Bhd (PNB). Prime Minister Datuk Seri Najib Razak announced on July 11 the setting up of the 1Malaysia fund comprising 10 billion units, which will be managed by PNB. The fund is open to all Malaysians above 18. Also, an additional 1.6 billion units of Amanah Saham Malaysia were offered for sale from July 21.
“In anticipation of PNB buying up the PNB counters in the next few months, investors have gone into stocks like Sime Darby, Maybank (Malayan Banking Bhd), UMW (Holdings Bhd), MMC Corp (Bhd) and S P Setia (Bhd),” says Teo.
Sime Darby is the perceived leader among the top plantation counters. As it traded higher, IOI and KLK were pulled along as they caught up with Sime, he adds.
An analyst covering the sector says the performance of regional markets also contributed to the strong performance of plantation counters. As the FBM KLCI has been a laggard against regional market performance, investors are buying into the major component stocks, mainly banks and plantation stocks, with the expectation that the index will catch up with its regional peers.
“It is liquidity driven and not necessarily because CPO prices are expected to be fantastic. The index has become so narrow, a fund benchmarked against it can’t afford not to have these stocks,” he says.
Then again, investors are now looking towards earnings potential in calendar year 2010, when the analyst is expecting a higher CPO price average compared with 2009.
Also, in the current reporting season, plantation companies are expected to have a better showing for the quarter ending June 30, 2009, compared to the preceding quarter, as CPO prices strengthened and production increased, although y-o-y comparisons may still show negative growth, he adds.
“The market is looking at the sequential change to spot the turnaround, in anticipation of strong earnings despite the current weakness in CPO price,” says the analyst, adding that the big cap plantation stocks may have limited upside. He prefers Genting Plantation Bhd and PPB.
Second liners have also benefitted from the big boys’ price performance. Genting Plantations, Kulim Bhd and IJM Plantations Bhd have all seen their share prices rising or well-supported.
PPB’s performance may be a different story altogether, driven by the impending listing of its 18.36%-owned Wilmar International Ltd on the Hong Kong Stock Exchange. Last week, South China Morning Post (like Wilmar, it is also owned by the Kuok family) reported that the company had chosen Hong Kong over Shanghai to float its shares, possibly raising US$3 billion (RM10.5 billion) to US$4 billion.
The share price of PPB has risen 45% from its low of RM9.40 early this year to RM13.60 last Friday. At last Friday’s price of S$5.77 and RM/SGD exchange rate of 2.45, PPB’s 18.36% stake in Wilmar is worth slightly more than its market capitalisation of RM16.12 billion. This shows that the market disregarded the group’s share in Malaysian Bulk Carriers Bhd and other businesses, for example, its interests in sugar refining and flour milling.
Currently, analysts’ mean estimate for Wilmar’s target price is S$5.61 with the highest value coming from UBS at S$7 per share.
As for CPO prices, the spectre of hot and dry weather affecting fruit production remains as the Australian Bureau of Meteorology says El Niño is still developing based on data from the Pacific Basin region and weather forecasting models. Meanwhile, the US-based National Oceanic and Atmospheric Administration, in its report dated July 20, notes that a majority of El Niño Southern Oscillation models indicate the El Niño phenomenon intensifying throughout 2009. The models differ on the strength of El Niño but most predict a moderate to strong episode.
On the technical side, CPO futures trader Donny Khor of OSK Investment Bank Bhd is expecting CPO futures to trade sideways, with the potential to move higher although the upside may be limited.
“The long-term major trend is still bearish as CPO is still in recovery mode after a major decline from RM4,400 to RM1,300. In the near term, CPO is expected to trade between RM2,220 and RM2,240 over the next two weeks,” he says.
Khor notes that heavy rainfall in the early part of the year in Sabah — a major palm oil producing state — is now affecting production numbers, which is providing a support to CPO prices. However, Indonesia planters are producing a good crop this year, he adds.
Indonesian authorities announced last week that an export tax on CPO will be removed in August. The base price used to calculate the duty has also been reduced.
This article appeared in Corporate page of The Edge Malaysia, Issue 765, July 27- Aug 2, 2009