CPO

Shares of Asia’s palm plantation companies have rallied over the last one year, riding a rebound in the prices of crude palm oil (CPO) due to lower seasonal production and dry weather conditions.

However, growth of at least 50% in the plantations index has lagged a rise of 55% in Malaysia’s benchmark index fuelled by bank stocks after the central bank raised interest rates last week.

And CPO prices may not stay high much longer because temperatures are set to cool and soybean oil, a rival vegetable oil, is expected to flood the market in the second quarter from a bumper harvest in South America.

Benchmark CPO futures on the Malaysian derivatives exchange are now trading at around 2,680 ringgit ($1,124) a tonne, or about 40% off a March 2008 record of 4,486 ringgit.

A January Reuters poll showed that average palm oil prices in Asia were set to rise more slowly this year and the next as gains from strong global demand are curbed by record vegetable oil output.

SOYOIL, WEATHER
CPO prices are expected to face significant downward pressure in April when a bumper crop of South American soybean is harvested, analysts said.

Palm oil, a cheaper substitute, is now trading at a 5% discount to soybean oil and if that gap narrows, analysts expect consumers to switch from CPO to soy oil, a healthier option.

Macquarie Research said the rebound in plantation stocks gave investors a good opportunity to reduce their exposure.

It rated IOI and Sime Darby as underperformers because both trade at 18 times 2010 earnings in a sector that trades at an average multiple of 17, and have the lowest production growth over the next three years.

“We believe the recent strength in CPO prices is largely seasonal, with the trend likely to reverse from the second quarter onwards,” it said in a note last week.

Concerns that recent dry weather will limit CPO production and keep prices high may be misplaced as plantation owners have not reported any abnormal impact from the lack of rainfall, said analysts.

The Malaysian Meteorological Department reported lower-than-usual rainfall in February, but it is predicting average to above average rainfall from April.

Drier-than-normal weather worsens biological tree stress and reduces the amount of fruit produced by a tree to make palm oil.

Malaysia, Indonesia and Singapore are the only markets in the world where stocks of palm plantation companies are traded. Shares of Indonesia’s Indofood Agri jumped the most, up 310% from a year ago, followed by London Sumatra, up 183%. Singapore’s Wilmar, the world’s largest palm oil producer, rose 126% and Sime gained 57%

“The weather is one factor that cannot be predicted, but our view is that plantation stocks will still do well this year,” said Ang Kok Heng, chief investment officer at Phillip Capital Management.

Strong consumption growth in China and India, the world’s top two importers of palm oil, will hold up demand for the vegetable oil this year, he said.

Global demand for CPO in January jumped 19.4% to 1.46 million tonnes, driven mostly by China’s stocking for the Lunar New Year.

Investors looking for long-term exposure to the sector should consider mid-cap Malaysian planters, such as IJM Plantations and Kulim, said Ang.

“There are opportunities to add (buy),” he said.

Standard Chartered Research, which recently initiated coverage of the plantation sector, is recommending a “buy” on the purer plantation companies.

“With their higher relative plantation exposure, lower valuations and higher betas, our preference is for Indonesian planters,” analyst Adrian Foulger said in a note, naming London Sumatra, Indofood Agri and Golden Agri.

HwangDBS prefers plantation stocks listed in Singapore or Indonesia over their fully-valued Malaysian peers, said David Ng, its chief investment officer.

“We are looking at non-Malaysian planters and would buy on weakness,” he said