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Asia Palm Oil Sector ------------------------------------------------------- Maintain UNDERWEIGHT
New report: What goes up must come down
● La Nina is usually a non-event but the 2010-11 La Nina was one
of the worst in history, leading to plantation stocks outperforming
at end-2010. According to weather experts, La Nina should have
already peaked; hence, the worst should be over. Palm oil prices
could still spike to RM4,000/t with weather vagaries, but we
believe this is unsustainable for a longer duration, as it leads to a
slowdown in demand.
● Huge price volatility in 2011E, but palm oil prices may have
already peaked: (1) speculative positions for soy, corn and palm
oil are at record highs – vulnerable to profit-taking; (2) supply
could surprise on the upside in 2011 (reversal of tree stress,
higher new planting in 2007 and rising output from higher rainfall).
● Maintain UNDERWEIGHT. We have raised our 2011 palm oil
price assumption to RM2,950/t (from RM2,300), but remain
UNDERWEIGHT, as the stocks are fairly valued. YTD, plantation
stocks have underperformed, but we expect further
underperformance. We maintain UNDERPERFORM on IOI Corp
and Sime Darby. Wilmar remains our only OUTPERFORM.
What goes up must come down
YTD, plantation stocks have underperformed, but we expect further
underperformance, as we believe palm oil prices have peaked. We
remain UNDERWEIGHT the plantation sector.
Key issues: Weather vagaries dominate again
What about La Nina and when does it end? La Nina is usually a
non-event, but the 2010-11 La Nina was a strong event, leading to
plantation stocks outperforming at the end of 2010. This La Nina
disrupted the harvesting of palm oil in Malaysia and Indonesia, and
threatened soy planting in South America. La Nina should last until
mid-2011, but it should have already peaked (worst is over) and
should approach neutral conditions in mid-2011.
Is palm oil at RM4,000/t sustainable? Palm oil prices could spike to
RM4,000/t with weather vagaries, but we believe this is unsustainable
longer term due to demand destruction.
Will supply of edible oils improve? Lucrative farm profitability is
expected to result in higher supply of palm oil and oilseeds in 2011,
depressing palm oil prices.
Could there be a fight for acreage? Corn could take acreage from
soy in the US. Watch for the US Planting Intentions report to be
released on 31 March 2011.
Who benefits more from rising palm oil prices? Malaysian
plantation companies are more leveraged (than their Indonesian
peers) to rising palm oil prices if palm oil prices are above RM3,000/t.
How have plantations performed? Plantation stocks have
underperformed YTD 2011.
What could go wrong with our call? (1) Weather, (2) crude oil price,
(3) USD:MYR and (4) excessive liquidity.
We remain negative on palm oil prices in 2011
Huge volatility due to weather vagaries. We expect huge palm oil
price volatility in 2011, as global oilseed and edible oil inventories are
at multi-year lows and there is little room for error. Palm oil prices will
swing depending on news flow on weather. Palm oil prices could
touch RM4,000/t again, but we strongly believe that this price is
unsustainable for a long period of time.
We believe the palm oil rally is closer to its end and may have
already peaked for the following reasons: (1) speculative positions for
soy, corn and palm oil are at record highs. Hence, these are
vulnerable to profit-taking; and (2) supply could surprise on the upside
in 2011 (the reversal of tree stress in Malaysia, higher new planting in
2007 and rising output from higher rainfall), resulting in depressed
palm oil prices. We expect palm oil prices to peak in 1Q 2011 and to
weaken thereafter.
Remain UNDERWEIGHT plantations
Revising up 2011 palm oil price assumptions to RM2,950/t (from
RM2,300/t). Palm oil prices jumped in 4Q 2010, primarily due to a
strong La Nina. The strength in palm oil prices continued into 2011,
but we believe the palm oil rally is closer to its end.
Maintain UNDERWEIGHT; expect further underperformance.
Plantation stocks are correlated to palm oil price movements and not
to average annual palm oil prices. YTD, plantation stocks have
underperformed, but we expect further underperformance, as we
believe palm oil prices have already peaked. We maintain
UNDERPERFORM on IOI Corp and Sime Darby. Wilmar remains our
only OUTPERFORM in the palm oil space. KL Kepong and
Sampoerna Agro remain a NEUTRAL. We upgrade Astra Agro,
Indofood Agri, London Sumatra and Genting Plantations to NEUTRAL
from Underperform.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Asia Palm Oil Sector ------------------------------------------------------- Maintain UNDERWEIGHT
New report: What goes up must come down
● La Nina is usually a non-event but the 2010-11 La Nina was one
of the worst in history, leading to plantation stocks outperforming
at end-2010. According to weather experts, La Nina should have
already peaked; hence, the worst should be over. Palm oil prices
could still spike to RM4,000/t with weather vagaries, but we
believe this is unsustainable for a longer duration, as it leads to a
slowdown in demand.
● Huge price volatility in 2011E, but palm oil prices may have
already peaked: (1) speculative positions for soy, corn and palm
oil are at record highs – vulnerable to profit-taking; (2) supply
could surprise on the upside in 2011 (reversal of tree stress,
higher new planting in 2007 and rising output from higher rainfall).
● Maintain UNDERWEIGHT. We have raised our 2011 palm oil
price assumption to RM2,950/t (from RM2,300), but remain
UNDERWEIGHT, as the stocks are fairly valued. YTD, plantation
stocks have underperformed, but we expect further
underperformance. We maintain UNDERPERFORM on IOI Corp
and Sime Darby. Wilmar remains our only OUTPERFORM.
What goes up must come down
YTD, plantation stocks have underperformed, but we expect further
underperformance, as we believe palm oil prices have peaked. We
remain UNDERWEIGHT the plantation sector.
Key issues: Weather vagaries dominate again
What about La Nina and when does it end? La Nina is usually a
non-event, but the 2010-11 La Nina was a strong event, leading to
plantation stocks outperforming at the end of 2010. This La Nina
disrupted the harvesting of palm oil in Malaysia and Indonesia, and
threatened soy planting in South America. La Nina should last until
mid-2011, but it should have already peaked (worst is over) and
should approach neutral conditions in mid-2011.
Is palm oil at RM4,000/t sustainable? Palm oil prices could spike to
RM4,000/t with weather vagaries, but we believe this is unsustainable
longer term due to demand destruction.
Will supply of edible oils improve? Lucrative farm profitability is
expected to result in higher supply of palm oil and oilseeds in 2011,
depressing palm oil prices.
Could there be a fight for acreage? Corn could take acreage from
soy in the US. Watch for the US Planting Intentions report to be
released on 31 March 2011.
Who benefits more from rising palm oil prices? Malaysian
plantation companies are more leveraged (than their Indonesian
peers) to rising palm oil prices if palm oil prices are above RM3,000/t.
How have plantations performed? Plantation stocks have
underperformed YTD 2011.
What could go wrong with our call? (1) Weather, (2) crude oil price,
(3) USD:MYR and (4) excessive liquidity.
We remain negative on palm oil prices in 2011
Huge volatility due to weather vagaries. We expect huge palm oil
price volatility in 2011, as global oilseed and edible oil inventories are
at multi-year lows and there is little room for error. Palm oil prices will
swing depending on news flow on weather. Palm oil prices could
touch RM4,000/t again, but we strongly believe that this price is
unsustainable for a long period of time.
We believe the palm oil rally is closer to its end and may have
already peaked for the following reasons: (1) speculative positions for
soy, corn and palm oil are at record highs. Hence, these are
vulnerable to profit-taking; and (2) supply could surprise on the upside
in 2011 (the reversal of tree stress in Malaysia, higher new planting in
2007 and rising output from higher rainfall), resulting in depressed
palm oil prices. We expect palm oil prices to peak in 1Q 2011 and to
weaken thereafter.
Remain UNDERWEIGHT plantations
Revising up 2011 palm oil price assumptions to RM2,950/t (from
RM2,300/t). Palm oil prices jumped in 4Q 2010, primarily due to a
strong La Nina. The strength in palm oil prices continued into 2011,
but we believe the palm oil rally is closer to its end.
Maintain UNDERWEIGHT; expect further underperformance.
Plantation stocks are correlated to palm oil price movements and not
to average annual palm oil prices. YTD, plantation stocks have
underperformed, but we expect further underperformance, as we
believe palm oil prices have already peaked. We maintain
UNDERPERFORM on IOI Corp and Sime Darby. Wilmar remains our
only OUTPERFORM in the palm oil space. KL Kepong and
Sampoerna Agro remain a NEUTRAL. We upgrade Astra Agro,
Indofood Agri, London Sumatra and Genting Plantations to NEUTRAL
from Underperform.
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