16 May 2012
RHB Research expects crude palm oil prices to fall further on the back of the seasonal peak production period for CPO in the second half of 2012, significant premium for larger plantation stocks no longer justifiable
We believe the time has come to start trimming holdings of plantation stocks, as we expect crude palm oil (CPO) prices to fall further on the back of the seasonal peak production period for CPO and improved prospects for the other vegetable oils in 2013.
Although there have been no significant changes to the supply and demand dynamics of the vegetable oil industry, we have noted some slight shift in focus and direction of late, and we believe a lot of the positive factors have already been fully-reflected in prices. In our recent sector reports, we have been cautioning investors to lock in profits once a decent return has been obtained and to only buy on dips.
We reiterate this view, but given the prospects of weaker CPO prices in the second half of 2012, we believe it is no longer justifiable for the larger plantation stocks to trade at a significant premium to the market, and are downgrading our valuation targets accordingly.
We are revising down our valuation benchmarks, and are now attributing a target price to earnings ratio of 14 times to 16 times for the big cap stocks (from 15 times to 17 times), 11 times to 13 times for the mid-cap stocks (from 12 times to 14 times) and seven times to nine times for the small cap stocks. We are downgrading our call on Genting Plantations to market perform (from outperform) and our call on KLK to an underperform (from market perform).
We are downgrading our sector recommendation to neutral (from overweight). Notwithstanding our cautious view on CPO prices, we highlight that Sime Darby is a situational play, as we believe the upcoming listing of Felda Global would have some positive knock-on effect on its valuations. We also see SGX-listed First Resources as a beneficiary of the change in export tax structure in Indonesia.
We maintain our view that CPO prices would remain strong in the first half of 2012, before weakening in the second half, on the back of seasonal factors. We believe CPO prices would average about RM3,200 to RM3,300 per tonne in first half 2012 and about RM2,900 to RM3,000 per tonne in the second half.