14/12/05 (The Edge Daily) - The strong performance of most plantation stocks has already taken into consideration the anticipation of higher palm oil prices in 2006, and analysts are now making a neutral call on this sector.

Most of the positive factors have already been priced in by the sharp rise in plantation stocks since the middle of this year, they said.

Avenue Securities Research said on Dec 14 that valuations appear to be closer to the historical high. OSK Investment Research says it “neutral” call is based on expectations of selling pressure next year, despite expecting higher crude palm oil prices.

“The delay in the much anticipated tree stress effect from the exceptionally high fresh fruit bunches (FFB) yields over the past three to four years continues to set in, with production declining 16.7% month-on-month and 2.7% year-on-year,” Avenue Research said.

It said palm oil exports for October declined 7.9% year-on-year and 16.6% month-on-month. Year-to-date for 2005, the export growth of 8.2% year-on-year was still commendable against the eight-year historical average growth of 7.4% per annum.

Avenue Research also said the market had been over-optimistic towards the immediate term crude palm oil (CPO) driven demand from biodisesel growth usage, indicating that immediate term growth has been priced in.

It also said there would be an ample global supply of oilseeds in 2005. Global palm oil production was expected to rise by 5.7%. US soya bean oil stocks were also at a four-year high.

OSK Research said the sector was not cheap at 14.8 times 2005 and 12.2 times earnings 2006 respectively as a lot of positive factors have been priced in by the sharp plantation stocks’ rally since May this year.

“CPO prices are nowhere near the RM1,500 –RM1,600 average prices expected for 2006. We believe some downward revisions might take place if CPO prices continue to hover at the RM1,400 levels or break below it,” it said.

It also said soyoil’s premium over palm oil has fallen further to just US$85 (RM320) compared with US$100 at the beginning of December.

“We interpret this as a signal that soyoil is being substituted with palm oil,” it said. However, it does not rule out the possibility of the premium narrowing as palm oil prices come under pressure due to record inventory levels.

Its stock calls remain unchanged with IOI Corp at neutral with fair value of RM13.35, and sell call for KL Kepong and PPB Oil Palms with a fair value of RM7 and RM4.55 respectively.

“We have a buy call for Asiatic Development which is trading at a PER of 8.6 times EPS (earnings per share) for 12 months to June 2007. This represents a steep discount of 28% to KL Kepong and PPB Oil Palms, which we view as a mispricing as Asiatic has substantially stronger margins. Target price for Asiatic is at RM2.44,” OSK Research said.