12:50 noon - Interesting news !

Malaysia's plantation sector upgraded as selldown overdone - Kenanga

KUALA LUMPUR (Thomson Financial) - Kenanga Investment Bank said Wednesday it has upgraded Malaysia's plantation sector to "overweight" from "neutral" as the recent selldown of plantation stocks was overdone. Crude palm oil (CPO) prices are expected to outperform expectations, it said. "Fortune favors the bold, (so) this is an excellent opportunity to buy quality planters such as Kuala Lumpur Kepong, Asiatic Development and Hap Seng Plantations which are trading at below 15 times price to earnings ratios,'' said analyst Yin Shao Yang. "Tradewinds Plantation, which recently staged an astounding recovery in earnings, is trading at only nine times 2008 price to earnings multiple," he said. Kenanga has a target price of 22.0 ringgit for Kuala Lumpur Kepong, 10.0 ringgit for Asiatic, 4.38 ringgit for Hap Seng Plantations, and 5.25 ringgit for Tradewinds Plantation. It has a "trading buy" call on IOI Corp, the second largest plantation company in Malaysia, with a target price of 8.45 ringgit. The stock has more upside potential than downside risk "given the management's penchant for mergers and acquisitions," said Yin. At 11.26 am, Kuala Lumpur Kepong was up 20 sen or 1.2 percent at 17.60 ringgit, Asiatic dropped 10 sen or 1.2 percent to 7.95 ringgit, Hap Seng Plantations edged down 2 sen at 3.10 ringgit, Tradewinds Plantation edged up 2 sen at 3.58 ringgit and IOI Corp was unchanged at 7.25 ringgit. Kenanga has also upgraded its 2008 average CPO selling price forecast to 3,100 ringgit per ton from 2,700 ringgit as it expects CPO prices to continue to outperform. The benchmark CPO futures contract for April last traded up 49 ringgit at 3,249 ringgit per ton. It hit an all-time high of 3,420 ringgit per ton on January 14. "The palm oil balance is not nearly as tight as that of soybean oil but palm oil prices are poised to track higher soybean oil due to substitution buying,'' said Yin, referring to the use of palm oil as a substitute for soybean oil. A recession in the US will likely not hurt CPO prices as well, he said. "(CPO prices) will be unperturbed by an impending American recession,'' said Yin. "We quantified that the correlation coefficient between CPO selling prices and the Dow Jones Industrial Average over ten years is very low at 0.22. "This finding is not surprising as the market for palm oil is largely in Asia and not the United States," he said. The two largest buyers of Malaysian palm oil are China and India. Malaysia and Indonesia are the two biggest palm oil producers in the world.