Published September 21, 2009

Crude palm oil prices forecast to increase

Indonesian planters' PE more attractive than Malaysian planters': Citigroup

By OH BOON PING

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STOCK valuations in the plantations sector are looking less attractive despite a higher earnings outlook, as most are now trading at or above their historical average price multiples, says Citigroup.

A 'buy': First Resources looks cheap relative to its peers, and its 10.4 forecast PE next year provides further upside, according to Citi

It maintains a 'buy' recommendation on First Resources at a raised target price of $1.30 and a 'sell' on Wilmar.

In a report, Citi analysts said they have raised crude palm oil price forecasts in the coming quarters. Most planters expect production to rise. But, said the analysts: 'We could see a seasonal increase in production and stocks in September 2009, but note that palm oil stocks are still unusually low. India's (third-largest buyer of vegetable oil globally) oilseeds production has improved due to rainfall in key growing areas.'

The analysts expect 'CPO prices to be range-bound over the near term, close to US$650 per tonne, barring any adverse weather developments and significant movement in oil prices beyond US$65 per barrel'.

Citi raised its CPO price estimates this year to US$650 per tonne from US$610 per tonne previously, while next year's forecast was raised to US$650 per tonne from US$550 per tonne.

Meanwhile, the United States Department of Agriculture recently raised its soybean production forecast to 88.3 million tonnes from 87.1 million tonnes and world soybean imports to 75.1 million tonnes from 74.5 million tonnes previously.

Against this backdrop, Citi prefers Indonesian planters to Malaysian ones, as the former are still trading at less demanding valuations.

For example, Malaysian planters look expensive at high PE, while Indonesian stocks are at low PE. The rich valuations of Malaysian stocks are attributable to buying support from local funds, the analysts say.

Moreover, most of the plantation landbanks in Malaysia are either freehold or are on long leases while Indonesian plantation estates are typically on 30-year leases.

'Although we do not think that the Indonesian companies will trade on a par with its Malaysian peers over the near term due to perceived corporate governance and country risks, the gap should narrow over time.'

Given the forecast price increases, higher volumes, and strengthening rupiah, Citi believes that First Resources looks set to benefit from the new scenario.

For a start, the stock looks cheap relative to its peers, and its 10.4 forecast PE next year provides further upside.

Plus, it comes with a favourable growth profile as the average age of its trees is eight years - early phase for optimum yield - and yield enhancement is likely.

This, along with rising oil extraction rate (following the new mill construction) and unplanted landbank of 112,000 hectares as at June 30, should provide favourable growth prospects for the company.

Plus, First Resources is a low-cost producer with US$200 per tonne cash cost, while management also continues to express its commitment to remaining prudent in its cash management. The stock closed at 93.5 cents on Friday.

In contrast, Wilmar looks over-priced as its 20.3 forecast PE this year and 16.8 next year are higher than its historical 13.6 PE.

As Wilmar is already a dominant player in the consumer pack cooking oil business in China, its growth there may be capped in the near term. The analysts also see limited upside in its profit margins and feel that Wilmar may not benefit substantially from any rise in CPO price level. Therefore, it recommends a 'sell' on the counter, albeit with a marginal rise in target price to $6.16. The counter closed at $6.71 on Friday.