Highlights

Despite our less-than bullish stance on the sector’s near term outlook, we remain positive on the sector’s longer term outlook, underpinned by scarcity of arable land for oil palm plantations and world population growth that will drive world demand for vegetable oil.

Given the sector’s positive longer term outlook, we believe plantation stocks with certain characteristics would still appeal to investors who have longer investment horizon and are willing to ride through the current down cycle. These include: (1) Plantation players with significant immature planted land bank; and/or (2) Plantation players with significant amount of property land bank.

In our plantation sector coverage (for comparison purpose, we excluded CBIP given its insignificant planted land bank relative to its earnings base as well as other plantation players), TSH, IJMP and Genting Plant will have higher-thanaverage FFB growth given that more than 40% of their planted land bank have yet to reach maturity.

We believe the listing of IOI Properties and Sime Darby’s plan to list its property division (although timing remains unknown), will sustain investors’ interest towards plantation companies with significant property exposure, as: (1) Aggressive property launches and commendable property sales will cushion earnings performance of plantation companies with property exposure over the next few years; and (2) Listing of the property business (IOI Properties and potentially Sime Darby Property) will prompt investors to relook at the valuation of the land bank of plantation companies (which are normally carried at historical costs).

Catalysts

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO;
• India imposes import tax on CPO.
• Longer-than-expected CPO price recovery path.

Risks

• Earlier-than-expected recovery in the world’s major economies, resulting in higher edible oil demand and prices;
• Weather uncertainties revisit, which would result in supply distortion, hence boosting prices of edible oil; and
• Further action from the Malaysian Government to boost competitiveness of downstream plantation players.

Rating

UNDERWEIGHT

Negatives – (1) Weak global economic outlook; and (2) Impending excess supply of CPO.

Positive – CPO is still relatively cheaper than soybean oil.

Sector View

Maintain Underweight on the sector, given our less bullish view on CPO prices as well as the sector’s expensive valuations. For exposure in the sector, our top picks are CBIP (BUY; TP: RM3.42) and Genting Plantations (HOLD; TP: RM10.57). The latter best fit the profile of sizeable immature planted and property development land bank.

Source: Hong Leong Investment Bank Research - 15 Jul 2013