HLIB Research 5 October 2011 (Plantations; TWSP; Traders Brief)

Stock Name: TWSPLNT
Company Name: TRADEWINDS PLANTATION BHD

Research House: HLG

Price Call: BUY

Target Price: 3.39

Plantations (Neutral)

Too early to turn positive

'''' Despite the recent downtrend in CPO prices, we are keeping our average CPO price assumptions of RM3,200/tonne in 2011 and RM3,000/tonne in 2012 and we remain positive on the sector's longer term outlook, underpinned by:

1. The possibility of La Ni''a returning has heightened supply risk, which in turn may will push CPO prices higher;
2. CPO's huge discount against soybean oil, which will in turn support both demand and prices of CPO; and
3. The peaking of palm oil production cycle (likely by Oct), which means lower supply and stockpile from Nov-11 onwards.

'''' However, we believe it is still pre-mature to turn bullish on the sector, given that:

1.'''' The potential further unwinding of speculative positions in the commodity assets and further quantitative easing will likely be insufficient to create additional liquidity that could in turn send commodity prices higher; and

2.'''' Comparatively, Malaysian plantation companies are valued at a premium to the regional players.

'''' In line with the recent sector de-rating in the regional plantation sector, we are cutting our target P/Es for plantation companies under our coverage by 1x from 10-15x to 9-14x.

'''' Following the cut in our target P/Es, TPs of the 5 plantation stocks under our coverage were cut by 3.8-10.1%. With the exception of TWS Plant (whereby recommendation was upgraded from Hold to Buy), our recommendations on Genp, IOI, KLK and Sime Darby remain unchanged at Hold following the cut in TPs

''

Tradewinds Plantation (Buy; TP: RM3.39)

A step closer to acquiring Mardec

'''' Prisma Spektra Sdn Bhd (a wholly-owned subsidiary of Tradewinds Plantation) has entered into and executed a novation agreement with the Government, the Minister of Finance and Semi Bayu Sdn Bhd for the novation of all Semi Bayu's rights and liabilities to Prisma Spektra. This means the acquisition of Mardec will be completed soon.

'''' Based on our earlier conversation with the management, the acquisition will enhance Tradewinds Plantation's earnings by RM17-18m p.a., equivalent to 7.3-7.7% of our projected 2012 core net profit of RM233.6m.''

'''' Earnings forecasts maintained for now, pending further update with management.''

''

FBM KLCI: Taking cue from the Dow

'''' Asian markets are likely to take the cue from the Dow's strong overnight late surge.

'''' Technically, indicators are still turning south but the formation of a Doji suggest that selling pressure may be subsiding and there is a potential technical rebound.

'''' Immediate resistance levels are the 1375 (5-d SMA), 1400, 1409 (mid Bollinger band) and 1430 (30-d SMA). Supports are situated at the psychological 1350, 1330 (lower Bollinger band), 1310 (26 Sep pivot low) and the other psychological 1300 level.

''

Dow: Piercing Line ' potential reversal pattern

'''' After yesterday strong late surge, the Dow's Candlestick has formed a Piercing Line formation, a potential reversal pattern.''''''

'''' Immediate resistance levels are 10941 (10-d SMA), the psychological 11k and 11,114 (mid Bollinger band) while support levels are at yesterday low of 10404, 10429 (38.2% FR ' from low in Mar 09 to high in May 11) and 10390 (74.6% FR ' from low in Jul 10 to high in May 11).