CIMB Research maintains underweight on plantations

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UALA LUMPUR: CIMB Equities Research is maintaining its underweight recommendation on Malaysian plantations due to their expensive price to earnings (P/E) valuations and unexciting earnings prospects.

"The average forward  P/E of the three big cap planters in Malaysia of 16 times is 33% higher than our target market P/E of 12x and 51% higher than regional plantation P/E of 10.6 times," it said in a report issued on March 5.

It expected crud epalm oil (CPO) price to be range-bound in short-term. Most planters are more upbeat on CPO price compared to the last quarter with most expecting CPO price to trade range-bound of between RM1,800 and RM2,000 per tonne in the short-term.

The more positive tone was due to concern of weaker soybean crops from South America, biological tree stress and heavier rainfall in parts of Malaysia leading to lower palm oil yields, lower palm oil stockpile in Malaysia and measures announced by the government to lower supplies and boost domestic consumption in the form of replanting incentives and biodiesel mandates.

On its analysis of the recent October-December results, it said they were mostly below its and consensus expectations. In the latest  results, 60% of the plantation companies under our coverage reported core earnings that were below our expectation. Against consensus, the ratio of underachievers’ was higher at 80%.

Only KL Kepong’s 1Q09 results were above our expectation but in line with consensus due to better-than-expected forward sales position.

However, IOI Corp and KL Kepong’s upstream plantation division performed better than its forecast due mainly to higher CPO price achieved thanks to forward sales positions locked in earlier.

Asiatic and HS Plant’s plantation earnings were short of its forecast due to lower-than-expected FFB production and higher operating costs. Sime Darby results were in line with its expectation. However, it was were taken aback by the 13% year-on-year decline in yields by its Indonesian estates in 1HFY09 and the larger losses at the downstream division compared to the previous year.

IOI Corp has the most profitable upstream plantation division. IOI Corp took over from Sime Darby as the most profitable upstream player in the recent quarter results, although its fresh fruit bunches (FFB) production was only 40% of Sime’s FFB production for that quarter. IOI Corp’s upstream plantation unit posted RM528m profit, 142% higher than Sime Darby’s profit of RM218 million due to higher selling price achieved and lower operating costs.

According to CIMB Research estimates. IOI Corp achieved average CPO selling price of RM3,085 per tonne against RM1,891 per tonne posted by Sime’s plantation estates in Malaysia.On the outlook for the current quarter, the research house expects mixed performances. For the first two months of the year, local CPO price averaged RM1,869 per tone which is higher than 4QCY08 average of RM1,606 per tonne but significantly lower than 1QCY08 average of RM3,477 per tonne.

"As such, we expect better qoq performances from plantation companies who sell their products on spot basis for exampleAsiatic and Sime Darby. However, the higher selling price achieved will be partially offset by lower production as 1Q is typically the lowest production quarter for the plantation companies.

IOI Corp and KL Kepong which achieved high selling price in the last quarter due to forward sales position may register lower qoq earnings in the coming quarter as their new forward position are likely to be at a lower prices.

With only 14% of its budgeted production locked in at RM2,800 per tonne, it expects Hap Seng Plantations' earnings to mirror the spot CPO prices. On a year-on-year basis, it expects all companies to report significantly lower plantation earnings due to lower selling prices.

It added that lower fertiliser costs benefit more evident in 2Q onwards. It came to understand most planters will only start enjoying the declining fertiliser prices of between 20% and 40% based on products types only in 2QCY08 due to some forward position or stock on fertiliser from the previous year.