Thursday, October 11, 2012

Plantation – Share Prices Not Reflecting CPO Price Movement – Is A Correction Coming? (Neutral)

Sector Update
  • Malaysia's CPO production jumped 20.4% mom in Sep, higher-than-consensus expectations of 18-19%, and 2011's 12% mom rise after the Hari Raya period in Aug 2011. Exports rose by a smaller 4.5% mom, and closing CPO stock levels rose by 17.4% mom to 2.48m tonnes in Sep, This led to a spike in the annualised stock/usage ratio to 14.1% (from 12.2% in Aug), which is above the historical 10-year average of 9.3% and also above the historical peak of 12.7%.
  • CPO prices have fallen from RM2,900-3,000/tonne in early Sept to RM2,200-2,300/tonne currently. We expect prices to remain weak in the next 1-2 months and only start to pick up moderately once the peak production period is over in Nov/Dec, which could see prices rising back to closer to the RM3,000/tonne level.
  • Should prices stay at current levels for the rest of the year, we estimate the average price for 2012 may turn out to be RM2,800-2,900/tonne instead.
  • We are leaving our 2013CPO price forecasts of RM2,900/tonne unchanged.
  • Despite the 25% fall in CPO prices since early-Sep, the plantation index has only fallen by 5.6%. While we concur that CPO prices will bounce back towards the year-end, we believe that share prices of the plantation stocks we cover are currently only reflecting CPO prices of RM2-700-3.000/tonne.
  • We believe it is therefore possible for share prices to fall a little further to reflect a larger fall in CPO prices before rebounding as per our expectation of CPO prices. We maintain our NEUTRAL call on the sector.
Source: RHB Research - 11 Oct 2012

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