Monday January 3, 2005 - PLANTATION stocks would likely kick off on acautious note in the New Year amid crude palm oil (CPO) prices coming downfrom their highs, and a bumper soybean harvest in the United States on theback of high stocks and increasing output by global producers.

With CPO prices quoted in US dollars, market players also expressedconcern that the sector could be severely affected should the ringgit bere-pegged higher.

An analyst with MIDF Sisma Securities said current bearish factors coulddrag CPO prices lower. He sees earnings among top plantation companiesslowing by 1.1% this year.

But, another plantation analyst said players like IOI Corp Bhd, AsiaticDevelopment Bhd and PPB Oil Palms Bhd could possibly register between 3%and 4% earnings growth next year based on their internal acreage expansionprogrammes.

Top plantation stocks closely monitored by both local and foreign researchhouses include IOI Corp, Golden Hope Plantations Bhd, Kuala Lumpur KepongBhd, PPB Oil Palms and Kumpulan Guthrie Bhd.

The region-wide tsunami-related devastation on Dec 26 has raisedexpectations that CPO prices may strengthen owing to disruption of supplyin Indonesia. The MIDF Sisma Securities analyst however believed adisruption would be short lived, and a significant increase in the priceof CPO unlikely.

The price of CPO has not appreciated since the tsunami struck, with thespot price closing below RM1,400 a tonne last week.

During the year just ended, many plantation companies registered handsomeprofits, and made good dividend payouts to investors.

Plantation analysts said most pure plantation players managed to sellforward at much higher CPO prices, between RM1,600 and RM1,700 a tonne,compared with the 2003 average of RM1,544.

The price of CPO, which reached a high of RM2,000 a tonne in April lastyear, has weakened to about RM1,400 currently, following the high domesticpalm oil stock level (at 1.41 million, the highest since February 2001),signs of El Nino, and US record soybean harvest (3.15 billion bushels).

A plantation analyst with a Singapore-based research house said: "Theaverage CPO price is expected to slip by 14% to RM1,400 a tonne this year,from the estimated average of RM1,620 last year, as strong global oilseedprices had prompted farmers to raise planting activities globally."

(The CPO price forecast, however, had not factored in the potentialadverse weather conditions in major planting areas, or the impact of Asianrust fungus in US soybean growing areas).

Analysts said last year also saw many plantation giants undertakingcorporate exercises - the ones coming to mind being the merger andacquisitions (M&A) activities to consolidate Permodalan Nasional Bhdplantation entities GHope, Island & Peninsular Bhd and Guthrie, Guthrie'sstalled merger exercise with Guthrie Ropel Bhd and Highlands and LowlandsBhd, IOI Corp's RM1.3bil bond-raising exercise, plantation assets mergerbetween Tradewinds (M) Bhd and Johore Tenggara Oil Palm Bhd, anddownstream activities expansion by Felda, PPB Oil Palms and KL Kepong.

Despite the bearish scenarios painted of the plantation sector, MIDF SismaSecurities said: "Those who wish to have some position in the sector,should look at IOI Corp, said to be the best bet."

Mayban Securities concurred that the stock offered one of the bestexposures, given the group's well-diversified plantation operations, andcontinued speculation on IOI Properties Bhd's privatisation, which wouldgenerate trading interest.

For the financial year (FY) ended June 30 last year, IOI Corp recordedpre-tax profit in excess of RM1bil, compared with RM812.6mil a yearearlier.

However, a Singapore-based research house expects the group's average CPOprice to trend downwards over the next three years.

"We expect IOI's average CPO price to be RM1,560 this year, down fromRM1,575 last year, and further fall to RM1,450 in FY06 and RM1,400 inFY07," it said.

IOI Corp closed at RM9.50 on the last day of trading in 2004, up 24% fromthe RM7.65 on the first trading day of the year.

As for GHope, its rationalisation exercise with Island & Peninsular,completed in November last year, transformed it into a larger plantationgroup, its land bank increasing by 45% to 172,312ha.

An analyst with a foreign-based research house said: "We expect GHope toreap an exceptional gain of RM200mil to RM250mil from the rationalisationexercise, which would be recognised in FY2005."

GHope's pre-tax profit for FY04 rose to RM471.9mil on the back of a strongturnover of RM2.80bil.

However, the M&A activities to further consolidate PNB's plantationentities cooled down after Guthrie's rationalisation exercise was voteddown by its shareholders.

In the event CPO prices rise, analysts expect investors to shift to pureplantation stocks like KL Kepong and PPB Oil Palms.

Mayban Securities, in its recent notes, said KL Kepong had one of thestrongest balance sheets among plantation companies.

One analyst said: "The group's strong cash position can be used to expanddownstream operations. Perhaps investors would prefer to see bettercapital management from the company via a higher dividend policy."

PPB Oil Palms is a top pick among analysts as this pure plantationsmall-cap stock has superior growth prospects with an attractiveplantation profile, which includes 53% of its estates located inhigh-yielding Sabah.

Going forward, an analyst said the anticipated further weakening in CPOprices next year would justify the aggressive moves downstream bycompanies like IOI and Golden Hope to offset the volatility in CPOprices.

Meanwhile, global CPO demand is expected to be strong enough to limit anyimpact from rising edible oil supply to the market softening, instead ofturning bearish.