Shares of Sime Darby, Wilmar and other Southeast Asian palm planters have rallied this year as crude palm oil prices have rebounded from lows hit in October.
Strong Chinese and Indian demand for oilseeds and edible oils and curtailed supply have driven the revival in CPO prices. But with valuations looking stretched — shares in the sector are up as much as 75 per cent this year — and future prices dependent on the vagaries of the weather, are investors on a slippery slope?
DIMINISHING WEATHER IMPACT
Yes, said UBS analyst Alain Lai, who has an “underweight”
rating on the sector.
A lack of supply from Indonesia and Malaysia, the world’s top two CPO producers, due to “tree stress” and lower soybean oil supply from Argentina, the largest producer of soybean oil, have aided prices of CPO, which is used widely as a cooking oil in Asia and also as a key ingredient in food processing.
Palm oil is a cheaper substitute for soybean oil and enjoys rising demand if the supply of the latter falls.
But Lai and some other analysts say these factors are expected to stabilise in the coming months as the soybean harvest is over and the current tree-stress cycle reaches its end.
“These factors will have a diminishing effect on edible oil prices in the coming months,” Lai said.
Unfavourable weather conditions this year have played a key role in pushing up the price of edible oils by reducing supply.
But there are mixed views on that continuing.
“The weather will be the key price-determining factor in the next few weeks and months,” said Merrill Lynch analyst Jeffrey Ng, who has underperform ratings on Malaysia’s Sime, the world’s largest listed palm oil firm, and its smaller rivals Kuala Lumpur Kepong and Asiatic.
Prices of CPO have almost doubled from RM1,300 per metric tonne in October but are still down more than 40 per cent from last year’s peak — a record RM4,486 in March 2008 — due to the global financial crisis.
Malaysian planters expect them to trade at around RM2,200 (US$629.8) a tonne in the second half. Benchmark CPO futures on the Malaysian derivatives exchange are now trading at around RM2,466 a tonne.
Malaysia, Indonesia and Singapore are the only markets in the world where stocks of palm plantation companies are traded.
They make up nearly a fifth of the Malaysian market’s US$234 billion capitalisation.
Shares of Malaysia’s IOI Corp have risen 31 per cent this year, while Sime has gained 34 per cent.
Singapore’s Wilmar has jumped 75 per cent and Indonesia’s Astra Agro Lestari is up 59 per cent.
Sime trades at 21.5 times 2009 earnings and Wilmar at 14.7 times. By comparison, the broader Malaysian market trades at about 13.4 times estimated earnings.
SUPPLY TO TIGHTEN?
But valuations are still lower compared with the price-earnings ratios that ranged between 25 and 82 times during the sector’s last boom in 2006.
“We are looking at palm oil stocks opportunistically, where in terms of valuations, they still present an upside,” said Raymond Tang, chief investment officer at CIMB-Principal, one of the largest money managers in Malaysia, overseeing US$5.5 billion.
RBS analyst Nirgunan Tiruchelvam, who has an “overweight”
stance on palm plantation stocks, also saw pressure on supply due to dry weather conditions aggravating “tree stress”, a condition that sharply reduces yields of palm trees after a bumper harvest.
“We expect a severe tightening of palm oil supply,” he said. — Reuters
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