16 January,2002 (Business Times) - GAINS made by plantation stocks overthe past few days are likely to be sustained as the upswing in crude palmoil (CPO) prices is expected to lift share prices of companies such as IOICorp Bhd, PPB Oil Palms Bhd, and Kuala Lumpur Kepong Bhd (KLK).

Analysts are certain that the shortage in palm oil supply will increasepalm oil prices in 2002, therefore increasing the upside price potentialand renewing interest in plantation stocks.

Yesterday, the Kuala Lumpur Stock Exchange (KLSE) Plantation Index closed2.87 points higher at 1,655.62 points. The KLSE Composite Index ended 2.02points higher at 700.47.“Now would be a good time to accumulate plantation stocks to hold forlongterm, about a year or so. This is because the sector might experience somehiccups throughout the year but when the global economy recovers, momentumwill carry forward and will lift palm oil prices,” an analyst said.“According to the sector’s cycle, palm oil prices are set to recover and Ibelieve prices will hit RM1,300 a tonne by the first half of the yeardespite lower production, and will then adjust to RM1,200 a tonne by thesecond half of 2002,” another analyst said.

Furthermore, improving fundamentals of plantation companies such as strongearnings growth and low gearing is also expected to have a furtherpositive impact on plantation counters, thus maintaining analysts’overweight recommendation on the sector.

Most analysts continue to favour IOI despite the stock inching uptremendously since last year, in view of factors such as inexpensivevaluations and strong management.

“Foreign funds are also buying into the company,” an analyst who has a buyrecommendation on the stock said. For the first quarter of its financialyear ending June 30 2002, IOI’s net profit increased to RM62.72 millionfrom RM50.51 million previously.

“The stock is trading at an undemanding price-earnings ratio (PER) of 9.7times in financial year 2002 and 8.1 times in financial year 2003 againstits earnings-per-share (EPS) growth of 70 and 20 per cent respectively,”another analyst said. The analyst had an outperform recommendation on IOIwhich closed at RM4.16 a share, an increase of 2 sen.

KLK, meanwhile, is also expected to outperform the broader market as thecompany has a large mature palm oil area, thus the firming CPO prices willfurther improve its earnings and strengthen its net cash position.“The estimate PER for KLK in financial year 2002 is 25 times and 17 timesfor financial year 2003. EPS growth for the stock is 21.7 sen in 2002 and31.8 sen in 2003,” one analyst said.

The analyst explained that as soon as the company completes itsrestructuring, investors would be more inclined to buy the stock. For itsfinancial year ended September 30 2001, KLK saw profits fall to RM61.2million from RM201.88 million. Net tangible asset (NTA) fell to RM4.50from RM4.53 a year ago.

KLK, which has a weightage of about 15.35 per cent on the KL PlantationIndex, closed at RM5.40 or 10 sen higher yesterday.

Other stocks that were recommended by analysts covering the sector includePPB Oil and Golden Hope Plantation Bhd.

Those contacted by Business Times gave an outperform recommendation on PPBOil as the company has a large mature area comprising mainly young palmsand is expected to enjoy a steady rise in yields in the next two years inline with the rising palm oil prices. PPB closed at RM3.48 a share, down 2sen.Golden Hope Plantation, which has the largest weightage on the KLPlantation Index, is only expected to outperform market.

For the first quarter of its financial year ending June 30 2002, NTA stoodat RM3.76. Net profit, meanwhile, fell to RM9.28 milliom from RM27.37million a year ago. The company has about RM60.59 million in cash and bankbalances and RM633.47 million in short-term investments. The stock closed2 sen higher at RM3.48 each.