Monday July 18, 2005 - POOR weather conditions in major oilseed producingcountries spells good news for the crude palm oil (CPO) price outlook withcommodity analysts projecting an average of between RM1,400 and RM1,500per tonne this year, and RM1,600 per tonne next year.

Of late, stock broking houses have turned bullish on the plantationsector, giving it an "overweight" recommendation compared with theirneutral stance previously.

Analysts concur that the CPO price prospect looks good, following reportsthat the drier-than-expected weather in major planting countries likeMalaysia, the US and India will crimp supply as the three countriesproduce about 30% of the world's edible oils.

The demand front also looks good with the rising bio-diesel demand fromthe European Union and anticipation of increasing consumption by China.

Analysts said CPO prices would be driven by weather-induced supplyconcerns, which would tighten global edible oil stocks, particularly nextyear, and prices would have to adjust upwards to ration demand.

Within the sector, major listed plantation groups like IOI Corp Bhd, KualaLumpur Kepong Bhd (KLK), PPB Oil Palms Bhd (PPBOP) and Golden HopePlantations Bhd (GHope) are potential beneficiaries of the CPO priceupswing.

Most analysts concur that IOI Corp remains the favourite large cap stockin plantation. IOI Corp's share price, for example, has stunned the marketas the stock closed at its all time high of RM11.00 last Friday.

"The return of investor interest in the stock has come about mainly fromthe revived interest in plantations," an analyst with MIDF SismaSecurities said.

"We have adjusted our CPO price expectations for IOI Corp in FY06 toRM1,525 per tonne, which is an earnings per share (EPS) upwards of 5.4%from our earlier forecast."

Khoo Eng Min

For the coming years, IOI Corp will enjoy a larger oil palm hectarage,with the inclusion of Pamol estates and its Sabah-based plantations.

OSK Research, in its recent notes, said: "Since our upgrade on plantationstocks in May, IOI Corp has risen by about 13.1%."

The research unit is recommending a buy on IOI Corp, which it believes isnot fully valued and its price earnings ratio (PER) could expand to 15.8times based on the historical trend. That will place IOI at RM12.20 pershare.

PPB Oil Palms (PPOP), meanwhile, has been the star performer amongplantation stocks of late. It has chalked up a 23.2% gain (including a 10sen dividend) since OSK Research, among others, upgraded the plantationsector.

The research unit said: "At the price of RM4.14, PPBOP has reached our12-month price target of RM4.12."

PPBOP managing director Khoo Eng Min, in a reply to StarBiz, said the CPOprice had been quite resilient, to date.

"We expect CPO prices to remain at or close to the current level for theremainder of the year, barring any major adverse weather phenomenon," headded.

Khoo said PPBOP expected any increase in palm oil production to beabsorbed by demand in the US and Europe, in addition to demand fromtraditional markets in East and South Asian countries.

The recent reduction in the palm oil stock level is a result of increaseddemand from these countries, and reduced CPO production, especially inJune.

According to Khoo, supporting factors which will drive PPBOP's earningsthis year will be the expected increase in CPO production from its estatesin Sabah and Sarawak, and Indonesia.

"We expect CPO production to increase 10% over that of 2004 and averageoil extraction rate to be about 21.8%.”"

Although there is increasing pressure from higher fertiliser and fuelcosts, he said the cost control and productivity measures that PPBOP hadin place would provide reasonable and comfortable margins for PPBOP thisyear, compared with last year.

He said PPBOP was positioning to be the most efficient producer ofsustainable and quality palm oil, and at the same time, mindful ofenvironmental, social and food safety issues.

A Singapore-based brokerage favours IOI Corp and KLK as its picks of thecrop in plantations. It said IOI Corp had better share liquidity and amore aggressive management team, which had done a better job at enhancingshareholders' value.

Weighing in on KLK are its cheaper valuations and higher earningssensitivity to CPO prices, which is a big plus in an environment of risingprices.

The brokerage said about 70% of KLK's pre-tax profit came from itsplantation division and the company was an efficient planter with abelow-industry CPO production cost of about RM746 per tonne in thefinancial year ended Sept 30, 2004.

"At current price levels, we prefer KLK for its higher absolute returnsand dividend yield," the brokerage added.

On GHope, the brokerage said its earnings upgrade was the steepest. Thisgroup's EPS for the financial year ending June 30, 2006, is expected to be30% higher from its earlier estimate. "Our new target price is RM4.14 andwe raise the rating from a sell to hold, and will review the call afterthe resolution of the distribution of Island and Peninsular Bhd's sharesto GHope shareholders, which is being held up at an on-going court case."