Plantations (Neutral)

Highlights from MPOB Seminar

'''' MPOB expects 2012 CPO production in Malaysia to increase to increase to 19.3m tonnes from 18.9m tonnes in 2011 on the back of: (1) Higher FFB yield; (2) Higher OER; and (3) More matured areas coming into production from replanting in 2009. As for Indonesia, industry expert expects CPO production in 2012 to expand to 26m tonnes from 24.55m tonnes in 2011.

'''' Besides having a direct negative impact on refiners' profitability and capacity utilization in Malaysia and India, the revised export taxes for palm products in Indonesia will also have an indirect impact to the upstream segment. This is mainly because India relies heavily on imported CPO for its downstream processing industry, and lower refined palm product prices from Indonesia will further weaken India refiners' price competitiveness and processing margin (of which the country is already suffering from low capacity utilization), hence reducing India's demand for CPO. This in turn means any reduction in the import of CPO from India will raise palm oil stockpile in Malaysia, hence affecting both demand and prices for CPO.

'''' Despite the current economic turmoil, most speakers expect CPO price to sustain at high level. MPOB expects CPO price to average at between RM3,100 and RM3,500 in 2012 assuming: (1) Crude oil price remains at US$100/barrel; and (2) Soybean oil price remains at US$950/tonne.

'''' We are keeping our Neutral stance on the plantations sector, given: (1) The unattractive valuation (in particular, the bigger plantation players) relative to their regional peers; and (2) Our less optimistic view on the downstream segment's fortunes. For exposure in the sector, our top picks are Tradewinds Plant. (BUY; TP: RM5.04) and TSH Resources (BUY; TP: RM2.13).

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KLCI: Lower liners and penny stocks to shine

'''' Unless KLCI stages a breakout above the 1531 level (31 Dec 11 high), market is likely to consolidate further with attention remain on lower liners and penny stocks as more investors return from CNY holidays. Immediate support is 1500 while resistance are the huge gap between the 1529-1546 levels dated 5 Aug 11.

BPPLAS: Awaiting a neckline resistance breakout

Downside risks are limited with strong potential to rerate higher due to its cheap valuations, in the wake of its savvy management, strong average 4-year net profit margins of 7.6% (TGUAN: 5%; GWPLAST: 6.4%), superior 4-year ROE of 11.7%'' (TGUAN: 6.4%; GWPLAST: 7.4%) and compelling valuations at 6.9x trailing P/E (industry: 8.8x). Ex-cash, BPPLAS is only trading at 3.8x P/E. Moreover, BPPLAS dividend is also the highest at 6.2% against industry 3.1%.

'''' Technically, BPPLAS medium to long term outlooks are positive as weekly and monthly indicators are on the mend. A breakout above RM0.68 (neckline resistance) will spur greater upside towards RM0.74 (61.8% FR) and RM0.83 (76.4% FR). Immediate supports are situated near RM0.58 (38.2% FR) and RM0.60 (weekly mid Bollinger band5). Cut loss below RM0.58.

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