October 18, 2011

Delayed El Nino effect to support CPO prices

Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: MIDFPrice Call: BUYTarget Price: 9.05



Plantation sector
Maintain neutral: In an analysis of palm oil production and the impact on prices for 2011/12, Ling Ah Hong, director of Ganling Sdn Bhd, said bad weather does not affect production immediately, and he is expecting delayed El Nino effects in 4Q11 and 1Q12.

The prolonged La Nina and El Nino can affect palm oil production for as long as 24 months after its occurrence.

Peninsular Malaysia experienced a prolonged drought from May to July 2009 and again in February to April 2010. Based on the physiological behavior of oil palm trees, the El Nino phenomenon will affect production in'' six to 12 months, which was in 1H10 and again after 22 to 24 months, which is 2H11.

The delayed El Nino effect is expected to provide short-term support for the crude palm oil (CPO) price, helping to realise our projected average price of RM3,200 per tonne for 2011. The projection now appears to be on the slightly conservative side. The year-to-date average is RM3,334 per tonne as at Monday. Based on our average price assumption, the implied CPO price average for the rest of 2011 is about RM2,700 per tonne. CPO price traded at RM2,864 per tonne on Monday and the RM2,700 level should be the short-term support.

The La Nina phenomenon in early 2011 helped to ease the moisture stress of palm oil trees caused by dry weather conditions in February to April 2010. Therefore, CPO production is expected to recover in 2011, having recovered sharply in 2Q11 and 3Q11. CPO production in 2Q11 jumped 40.8%quarter-on-quarter to 5.03 million tonnes; in 3Q11 it rose by 5.2% q-o-q to 5.29 million tonnes.

Plantation companies under our coverage are expected to enjoy an average of 34.4% earnings growth in FY11 mainly benefiting from higher forecast average CPO price and higher projected output.

According to the head of Commodity Derivatives Product Development of Bursa Malaysia, the bourse is planning to introduce RBD Palm Olein futures that can be used by refiners to lock in refining margins. Refiners are currently using CPO futures to hedge against CPO price volatility in the market. The product is expected to be on the market in 2012.

We remain 'neutral' on the sector given that output is expected to moderately recover and production is expected to resume its normal production cycle in 2012. We continue to like Sime Darby Bhd ('buy', target price: RM9.05) because of its huge landbank that will translate into 7.5% fresh fruit bunch (FFB) growth and 8.3% CPO growth in FY12. We are also maintaining our 'buy' recommendations on TH Plantations Bhd (TP: RM2.26) due to its stable dividend payout and TSH Resources Bhd (TP: RM3.54) due to its large immature areas that are expected to provide 23.6% FFB growth in FY12. ' MIDF Research, Oct 18


This article appeared in The Edge Financial Daily, Ocotber 19, 2011.

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