27/9/06 (The Star) - PETALING JAYA: The premium valuation of plantation stocks at present reflects the potential of the biodiesel industry, analysts said.

“If you buy into the biodiesel story, then the 18 times PE (price/earnings) is not expensive,” said a plantation analyst at a local brokerage.

He said the market was “bullish” on crude palm oil prices remaining firm as demand was anticipated to be driven by biodiesel operations in the country, most of which would come onstream next year.

“Firmer prices also mean better earnings growth for plantation companies,” he said, adding that vegetable oils would eventually track crude oil prices.

The expectation that crude oil prices would remain high had increased the viability of biodiesel, he said, adding that a number of governments including Malaysia had allocated tax incentives for biodiesel and biofuel, which made it more cost effective.

Nonetheless, he said the viability of biodiesel was subject to the prices of crude palm oil (CPO) and crude oil as the former constituted the bulk of the cost of producing biodiesel.

OSK Securities analyst Alvin Tai, who noted the present high inventory level of palm oil, said the stockpile was expected to drop significantly next year, given the strong requirement for biodiesel production.

As such, CPO prices were likely to rally, he said, adding that prices of plantations stocks had yet to factor in the stronger-than-expected prices.

Tai also said the weakening of crude oil prices was unlikely to dampen demand for alternative fuels like biodiesel as demand would be driven by governments such as the European Union, which set 5.75% of transport fuel to comprise biodiesel by 2010.

Another research house analyst was less optimistic. He said there were “excesses in share prices” as valuations of plantation companies had moved ahead of CPO prices.

He said CPO prices were not driven by supply and demand alone but could also be pushed by hedge funds.

“When the commodity funds cash out, CPO prices could drop significantly,” he said, adding that demand for biodiesel would not essentially be strong since there were other energy alternatives such as hydrofuel.

“As technology advances, there would be demand for alternative fuel but not necessarily for biodiesel,” he said, adding that other vegetable oils such as rapeseed and soybean could also be used over palm oil as sources of energy.

Shares in IOI Corp Bhd, Golden Hope Plantations Bhd, TH Plantations Bhd and Kuala Lumpur Kepong Bhd ended flat yesterday at RM16.10, RM4.72, RM2 and RM11 respectively.

Kumpulan Guthrie Bhd, however, lost four sen to RM3.70 and PPB Oil Palms Bhd shed five sen to RM7.60.