Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: HLG
Plantations
Jan 18, 2011
Overweight, IOI Corp Bhd (Jan 18, RM5.98); Sime Darby Bhd (Jan 18, RM9.34); Tradewinds Plantations Bhd (Jan 18, RM3.45): Our call on plantations is 'overweight' and our top picks are IOI Corp ('buy', target price RM6.62); Sime Darby ('buy', TP RM10.76) and Tradewinds Plantations ('buy', TP RM4.60).
Key takeaways from Datuk Yeo How (president of Asian Agri Group, a leading private Indonesian palm oil group): Crude palm oil (CPO) price will average RM3,600 a tonne for 2011 (and has the potential of rallying beyond RM4,000 a tonne in the near term, albeit with greater price volatility relative to 2010).
Yeo's bullish outlook was underpinned by the record low inventory levels for several major oilseeds and grains due largely to adverse weather conditions; and strong demand outlook, with demand rationing by major oil consuming countries possibly not coming in to place.
He is of the view that the current high commodity prices will be cushioned by the record low inventory levels for several major oilseeds and grains (including soybean, sunflower oil and CPO). While the weak corn and soybean crop would have already been factored into the current high prices.
Yeo believes that soybean prices will soar higher should crops come in below expectations (which at the current juncture will likely to surprise on the downside) and hence result in higher CPO prices.
Beyond 1H11, while he believes that CPO output will recover from 2H11 onwards (which could potentially result in a much lower CPO price), it is important to note that the quantum of the crop recovery remains questionable. This will not soften CPO prices should crop recovery be weak.
Both demand and prices will likely strengthen post Chinese New Year as: (i) China will likely begin inventory replenishing post CNY given the low inventory level; and (ii) we will move away from seasonally weak demand during the winter months.
While there are concerns that skyrocketing commodity prices may result in demand rationing for CPO, Yeo believes that this is unlikely to happen at this juncture given that prices of other oilseeds have increased substantially as well.
Fundamentals aside, he believes that current high commodity prices are also supported by: (i) the flush of liquidity (he believes there is still room for financial demand to push CPO prices higher); and (ii) the weak US dollar (the inverse relationship between US dollar and CPO price).
For the downstream segment, while margins for the refining business will remain tight amid current high CPO prices, he believes that margins could still improve from 2011. As for the viability of biodiesel, Yeo believes mandates from various countries (promoting the use of biodiesel via subsidies) should help cushion biodiesel consumption despite it being still not economically viable on a free market basis.
The risks include: (i) Global vegetable oil (including CPO) production comes in higher than expected, which will result in lower than expected CPO prices; and (ii) demand rationing by certain oil-consuming countries (such as India) when vegetable oil prices skyrocket to a certain level, which would bring down consumption of vegetable oil.
While Yeo's 2011 CPO price forecast of RM3,600 a tonne is higher than our forecast of RM3,200 a tonne, we note that there is still plenty of upside to plantation stocks at current share price levels, as the five plantation stocks under our coverage (Genting Plantations Bhd, IOI Corp, Kuala Lumpur Kepong Bhd, Sime Darby and Tradewinds Plantations) are still trading at below two-year historical forward price-earnings mean. ' Hong Leong Investment Bank Research, Jan 18
This article appeared in The Edge Financial Daily, January 19, 2011.
Company Name: SIME DARBY BHD
Research House: HLG
Plantations
Jan 18, 2011
Overweight, IOI Corp Bhd (Jan 18, RM5.98); Sime Darby Bhd (Jan 18, RM9.34); Tradewinds Plantations Bhd (Jan 18, RM3.45): Our call on plantations is 'overweight' and our top picks are IOI Corp ('buy', target price RM6.62); Sime Darby ('buy', TP RM10.76) and Tradewinds Plantations ('buy', TP RM4.60).
Key takeaways from Datuk Yeo How (president of Asian Agri Group, a leading private Indonesian palm oil group): Crude palm oil (CPO) price will average RM3,600 a tonne for 2011 (and has the potential of rallying beyond RM4,000 a tonne in the near term, albeit with greater price volatility relative to 2010).
Yeo's bullish outlook was underpinned by the record low inventory levels for several major oilseeds and grains due largely to adverse weather conditions; and strong demand outlook, with demand rationing by major oil consuming countries possibly not coming in to place.
He is of the view that the current high commodity prices will be cushioned by the record low inventory levels for several major oilseeds and grains (including soybean, sunflower oil and CPO). While the weak corn and soybean crop would have already been factored into the current high prices.
Yeo believes that soybean prices will soar higher should crops come in below expectations (which at the current juncture will likely to surprise on the downside) and hence result in higher CPO prices.
Beyond 1H11, while he believes that CPO output will recover from 2H11 onwards (which could potentially result in a much lower CPO price), it is important to note that the quantum of the crop recovery remains questionable. This will not soften CPO prices should crop recovery be weak.
Both demand and prices will likely strengthen post Chinese New Year as: (i) China will likely begin inventory replenishing post CNY given the low inventory level; and (ii) we will move away from seasonally weak demand during the winter months.
While there are concerns that skyrocketing commodity prices may result in demand rationing for CPO, Yeo believes that this is unlikely to happen at this juncture given that prices of other oilseeds have increased substantially as well.
Fundamentals aside, he believes that current high commodity prices are also supported by: (i) the flush of liquidity (he believes there is still room for financial demand to push CPO prices higher); and (ii) the weak US dollar (the inverse relationship between US dollar and CPO price).
For the downstream segment, while margins for the refining business will remain tight amid current high CPO prices, he believes that margins could still improve from 2011. As for the viability of biodiesel, Yeo believes mandates from various countries (promoting the use of biodiesel via subsidies) should help cushion biodiesel consumption despite it being still not economically viable on a free market basis.
The risks include: (i) Global vegetable oil (including CPO) production comes in higher than expected, which will result in lower than expected CPO prices; and (ii) demand rationing by certain oil-consuming countries (such as India) when vegetable oil prices skyrocket to a certain level, which would bring down consumption of vegetable oil.
While Yeo's 2011 CPO price forecast of RM3,600 a tonne is higher than our forecast of RM3,200 a tonne, we note that there is still plenty of upside to plantation stocks at current share price levels, as the five plantation stocks under our coverage (Genting Plantations Bhd, IOI Corp, Kuala Lumpur Kepong Bhd, Sime Darby and Tradewinds Plantations) are still trading at below two-year historical forward price-earnings mean. ' Hong Leong Investment Bank Research, Jan 18
This article appeared in The Edge Financial Daily, January 19, 2011.
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