Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: ECMLIBRA

Plantation sector
Upgrade to overweight: We view that there may be impetus for crude palm oil (CPO) prices to run further in coming months. The key drivers for prices are: (i) strong exports which are already up 6.4% year-to-date (YTD); (ii) weak production that is only up 1.6% YTD; (iii) upcoming festive season demand may see CPO stock levels tumble; and (iv) the soyabean market faces a tightening in supplies due to China's demand. Just to illustrate the severity of point (iv), 9MCY10 imports by China already make up some 94% of full-year 2009 imports.

For 2011, we see that CPO prices have a good potential to average at RM2,700 per tonne. It might appear low compared with current CPO prices, but let us not forget that CPO prices are volatile. We view that prices will be stronger in 4Q10/1H11, given the factors mentioned above, but then may calm down in the later part of the year as supplies of other oil seeds may recover, cooling demand for palm oil. Of course, this is assuming there are no weather shocks next year affecting palm oil or other major oil seeds.

The picture we paint appears to make for another CPO price rally, however, there are always risks we have to watch out for: (i) a strong South American crop may balance out soya market supplies; (ii) a drop-off in exports due to overstocking in countries like China; (iii) strong production of other oil seeds may reduce the need for palm oil as a replacement; and (iv) structural changes like import duties or quotas that may affect exports.

Following our series of earnings and call upgrades for the stocks under our coverage we are now formalising our 'overweight' view on the sector. We note that Sime Darby (YTD -1.2%) and IOI (YTD +6.2%) particularly have been laggards compared with the FBM KLCI (YTD +17.3%). KLK (YTD + 17.6%) and Genting Plantations (YTD +36.5%), on the other hand, have been stronger YTD. Hence, we view more upside potential for Sime Darby and IOI, citing them as the top picks for the sector. ' ECM Libra Investment Research, Oct 28


This article appeared in The Edge Financial Daily, October 29, 2010.

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