MacQ CPO: What would make Sunaina positive?

CPO: What would make Sunaina positive?

Sunaina Dhanuka (analyst) reiterates her Underweight call on Malay/Indo CPO stocks, with top sell ideas being IOI Corp and KL Kepong in Malaysia, and Astra Agro Lestari in Indonesia. She expects CPO prices to weaken as palm oil inventories climb back up in 2Q09, while valuations remain relatively expensive. Key arguments:

(1) Demand slowdown due to poor economic climate.

(2) US show farmers likely to shift acreage in favour of soybeans in 2009, which could compensate for the loss of South American production this year.

(3) Regulatory risk in the EU against the use of CPO for biodiesel.

(4) Potential threat of an import duty levy on palm oil in India.

Astra Agro Lestari – rating downgrade from Neutral to Underperform, on 12.4x P/E and 5.2% dividend yield for 2009, assuming US$400/ton CPO price average (vs. KL futures price of US$522/ton). She has a target FY09 P/E multiple of 8x, or Rp7,800 PxT (36% downside) assuming US$400/ton CPO price. But if CPO price were to hit US$600/ton, her PxT would move to Rp15,400 (27% upside).

My take – AALI is a high quality CPO play offering reasonable P/E multiple compared to its Malaysian peers (IOI on 22x, KLK on 26x), with (lack-of) stock trading liquidity being one key reason for the discount. Appetite for commodities investing appears to be coming back although it is still early days (see comment from Chicago Board of Trade on soybeans trading last Friday). Investors may see any selling pressure on AALI as an opportunity to accumulate the stock.