Even though crude palm oil (CPO) prices have declined 35% to RM2,020 currently from the six-month peak of RM2,735 per tonne on May 13, share prices of big cap plantation stocks are still holding up.
In fact, the share price of Sime Darby Bhd, the world’s largest listed plantation company, has surged 40.6% over the last six months. Analysts have mixed views on the stock, with eight analysts calling a “buy”, four “holds” and 16 “sells”. Analysts’ mean target price for Sime Darby, based on data tabulated by Bloomberg, is RM6.44.
The most bullish among the analysts covering the stock is RBS Asia’s Nirgunan Tiruchelvam, with his target price of RM9.29. The most bearish is BNP Paribas, with a target price of RM4.60.
An alternate exposure to Sime Darby is via structured warrants. There are two structured warrants on the stock — Sime-CG issued by OSK Investment Bank Bhd and Sime-CF issued by CIMB Investment Bank Bhd.
Both are non-collateralised American-style cash-settled call warrants. American-style means that the warrants can be exercised at any time until their expiry.
Sime-CG was issued on Dec 19, 2008, and matures on June 18, 2010. It was issued at 12 sen each, with an exercise/conversion ratio of 10:1 at the exercise price of RM5.35. Hence, the breakeven price for Sime-CG warrants is RM6.55 (10 times the warrant’s exercise price of 12 sen, plus the exercise price of RM5.35) for those who bought at the issue price of 12 sen each.
Based on Sime-CG’s closing price of 24.5 sen last Friday and Sime Darby’s last price of RM7.45, the warrants are valued at RM7.80 (10 times 24.5 sen plus RM5.35), which is at 4.6% premium to the mother share.
Sime-CF was issued on Dec 10, 2008, at 29 sen each and matures on June 9, 2010. It is exercisable at a ratio of four warrants per Sime share at an exercise price of RM5. As such, the breakeven price is RM6.16 (four times the warrant’s exercise price of 29 sen, plus the exercise price of RM5) for those who subscribed for the warrants at the issue price.
Based on Sime-CF’s closing price of 69 sen each last Friday and Sime Darby’s last price of RM7.45, the warrants are valued at RM7.76, which translates to a premium of 4.2% to the mother share. This makes Sime-CF the cheaper of the two warrants.
CIMB Research has a “trading buy” call on Sime Darby since April 17, 2009. In its latest report on the plantation giant dated July 2, CIMB maintains its “trading buy” call and target price of RM8.40.
It said the potential catalysts for Sime Darby include a shift in the allocation of funds to match the FBM KLCI, which made its debut on July 6; better-than-expected performance from Sime’s non-plantation businesses; increased flow of foreign funds into the Malaysian market; and potential earnings enhancement from merger and acquisition activities.
The outlook for CPO prices remains mixed in the face of short-term bearish factors, such as high stockpiles of edible oil in importing countries and rising CPO inventory and production, as shown by the Malaysian Palm Oil Board’s June palm oil statistics.
The weather remains a wild card although the Australian Bureau of Meteorology says strong indicators of El Nino continue to persist. The US Weather Prediction Center says El Nino conditions will continue to develop through 2009 and early 2010, but different models disagree on the eventual strength of El Nino. However, all models predict a moderate to strong episode, it says.
Although the warrants are trading at a premium, they still have close to another year to go before expiring mid-2010. Those who believe there is still upside to Sime Darby’s share price may ride on the stock’s performance through its warrants, which may deliver higher percentage of gains due to their high gearing.
This article appeared in Capital page of The Edge Malaysia, Issue 764, July 20-July 26, 2009