22/07/2008 (The Star Online), Petaling Jaya - Analysts remain positive on plantation stocks despite the heavy sell-off over the last one week due to a slide in palm oil futures prices.

Yesterday, the benchmark palm oil October futures contract closed RM132 lower at RM3,260 per tonne after crude oil fell to a six-week low on July 18, reducing the attractiveness of palm oil as an alternative fuel.

The current crude palm oil (CPO) price had eroded by about 27% from its all-time high of about RM4,486 per tonne in March.

The downward trend in palm oil futures was also due to the fact that Argentina, the world's third-largest soybean producer, said last week it would lower export taxes.

As a result of the weakness in CPO prices, plantation stocks that were among the most resilient in recent months experienced accelerated profit taking, especially the big-cap stocks

Among the major losers yesterday were Kuala Lumpur Kepong Bhd, which fell 30 sen to RM13.50. The stock had fallen by RM2 since last week.

Heavyweight IOI Corp Bhd fell 10 sen to RM5.50 while Sarawak Oil Palms Bhd was down 25 sen to RM5.40. Sime Darby Bhd declined 15 sen to RM7.60.

OSK Research analyst Alvin Tai said the downward trend in CPO prices was expected to be temporary and its price level would not fall below the RM3,000 benchmark.

“CPO prices are expected to recover, driven by a surge in demand for cooking oil from China during the Beijing Olympics in August,” he said.

He added that plantation stocks would move in tandem with the CPO prices, hence they would start picking up latest by mid-August.

An analyst with a bank-backed brokerage concurred with Tai, saying that fundamentals were still strong for palm oil stocks and their prices would recover in two to four weeks.

“The outlook for the industry is still very positive as the cost of production was still the lowest for palm oil planters,” he noted.

Citigroup analyst Penny Yaw, in a report, said she was still bullish on plantation counters such as IOI Corp and Sime Darby, with target prices of RM11.02 and RM15.65 respectively.

“We believe that the stock usage ratio for palm oil would decline in the coming months as we head towards the Ramadan fasting season as well as when China starts to stock up again,” the report said.

Meanwhile, windfall tax collection by the Government from plantation companies would also dip as a result of the current slide in CPO prices.

The tax applies to the difference between the current price and the threshold price of RM2,000 per tonne.

Earlier reports said the Government was expected to collect RM2.3bil in windfall tax from oil palm planters in the next 12 months if CPO continued to trade at its previously average price of RM3,500 per tonne.