Thursday February 17, 2005 - SPOOKED by India's decision on Tuesday toraise import tax on crude palm oil (CPO), refined, bleached and deodorise(rbd) palm oil and palm olein, and the continued rise in palm oil stocks,research houses have turned bearish on the plantation sector.

Many have now taken an "underweight" stance on the sector, downgraded keyplantation stocks like PPB Oil Palms Bhd, IOI Corp Bhd, Kuala LumpurKepong Bhd and Golden Hope Plantations Bhd to either "sell" or "takeprofit" on expectation of weaker CPO prices, and trimmed their earningsforecasts for this year.

After spot CPO price fell early this month to RM1,260 per tonne fromRM1,372 early last month, plantation analysts are lowering the average CPOprice target to RM1,350 per tonne for this year and RM1,400 next year.

Said one analyst: "The current downward trend in CPO prices will put a lidon plantation stock prices in the short to medium term."

He expects CPO prices to weaken further in the absence of a strong pick-upin exports and in the case of market sentiment that has been dampened byIndia's move to raise import tax on CPO to 80% from 65% previously andthat on rbd palm oil and palm olein to 90% from 75%.

The analyst said India was likely to buy less CPO this year as a result ofthe import tax increase, which made the commodity less attractive in termsof cost compared with soybean oil. Import tax on soybean remains unchangedin India.

Among plantation stocks, MIDF Sisma Securities has put a "take profit"call on IOI Corp. "There are already signs that IOI Corp's earnings willslow down this current financial year, it said.

The brokerage also has an "under perform" call on KL Kepong and PPB OilPalm due to the companies' dependence on CPO, which accounts forsignificant contributions to their earnings.

OSK Research, for its part, has downgraded IOI Corp stock from "neutral"to a "sell" given its current overvaluation. Despite the group'saggressive expansion into downstream activities, internal usage of CPOstill accounts for only about 25% of its total production, leaving 75% ofit still subject to CPO price volatility.

The research house said IOI Corp had locked in 60% of its CPO productionfor FY05 at an average price of RM1,560 per tonne. Assuming the remaining40% is sold based on a lower average CPO price of RM1,350 per tonne, IOICorp's earnings prospects would be trimmed this year.

As for KL Kepong and PPB Oil Palms, OSK Research is recommending a "sellinto strength" strategy given the weakening CPO price outlook.

Meanwhile, Mayban Securities is among the few that have reiterated an"overweight" on the plantation sector.

PPB Oil Palms remains a favourite pick of the brokerage due to itsattractive dividend yield at 4.8%. It is maintaining a "buy" call on KLKepong and a "trading buy" on Golden Hope. And it has a "hold" call on IOICorp with a price target of RM9.70 over the next 12 months.