12 August 2008
downgrade to hold (from BUY)
Price RM5.90
Market capitalization RM4,455 million
insider asia Analyst Linda Koh
Company/Sector Update
Key stock statistics 2007 2008E
EPS (sen) 45.6 57.2
P/E (x) 12.9 10.3
DPS (sen) 14.0 17.0
NTA/share (RM) 2.71 3.16
Issued capital (mil) 756.2
52-week price range (RM) 4.80-9.40
Major shareholders (%)
Genting 55%
EPF 7.4%
Year-to-date CPO production outpaces demand growth
Downward momentum likely to persist in near term
Bearish sentiment for plantation stocks
Downgrade to HOLD – longer-term fundamentals intact
Share Price Chart
The outlook for crude palm oil (CPO) has turned distinctly bearish in the near to medium term.
After averaging at around RM3,485 per tonne for the first seven months of the year, CPO prices tumbled sharply in the past month. Benchmark futures contracts traded on the Bursa Derivatives are currently trading well below RM2,600 per tonne.
The fall was triggered by sharply lower crude oil prices. After rising to all-time record high of US$147 per barrel in mid-July, crude oil futures on the New York Mercantile Exchange are now hovering around US$113 per barrel, down by some 23%.
This latest price retreat was fuelled by concerns that the slowing global economy will hurt demand. There are nascent indications that oil consumption in the US is starting to slow while China reported lower imports in July. The US and China are the world’s largest and second biggest oil consumers, respectively. A stronger US dollar has further accelerated the fall in crude oil prices and most other commodities.
Cheaper crude oil prices translates into less financial incentive to produce alternative biofuel, for which corn and other oilseeds including CPO are used as feedstock.
There were also some concerns that mandatory biofuel quotas in the US and Europe could be suspended or delayed. Usage of food crops to produce biofuel has been blamed for rising prices for food worldwide.
On the supply side, global crop production outlook has also improved with more favourable weather conditions. The recovery in stockpiles for many edible oils has weakened prices further.
Malaysia’s production of CPO has been rising at a faster pace than demand, so far this year. CPO output up to July increased by some 21% y-y to 9.76 million tonnes. Exports, on the other hand, have grown by a lesser 16% y-y to 8.33 million tonnes during the same period.
As a result, stockpiles have grown – to as high as 2 million tonnes in June. Stock levels were pared back slightly to 1.98 million tonnes in July on the back of higher exports. However, it appears that the momentum for CPO remains downward biased, for now.
While global consumption of edible oils should continue to grow at a steady pace, expectations of double-digit CPO production growth in 2008-2009, could keep stock levels high.
Looking further ahead, much will depend on the direction of crude oil prices, weather conditions that could affect planting and harvests as well as the strength in demand.
For instance, we may see renewed stocking up by buyers if CPO prices continue to slide, especially heading into the later part of the year where demand is seasonally stronger. That would help pare down existing stockpiles.
Cheaper crude oil prices will reduce the incentive to produce alternative biofuel. On the other hand, lower feedstock prices could also revive stalled biodiesel programs. While CPO prices remain high, these projects are economically unfeasible.
So far, the government has issued more than 90 biodiesel licenses, with total production capacity of up to 10 million tonnes. However, recent reports indicate only 12 plants, with capacity totaling 1 million tonnes, are currently up and running – and most are operating at well below capacity. Total output this year is estimated to be less than 100,000 tonnes.
At lower CPO prices, utilisation levels could trend higher. Also, the US Environmental Protection Agency recently rejected calls to suspend a federal mandate on biofuel, which requires the usage of 9 billion gallons in renewable fuels this year. The mandate increases annually to 36 billion gallons in 2022. This bodes well for the biodiesel industry.
a comment: it should be denoted by US gallon,which equivalent to 3.785L
We have previously assumed CPO average selling prices of RM2,800 per tonne in 2009-2010 in our earnings forecast. We are keeping these assumptions for the moment, while waiting for prices to stabilize.
Impact on Asiatic Development
Falling CPO prices are expected to weigh on earnings for most plantation companies, including Asiatic Development.
The company sells most of its CPO in the spot market. Thus, the drop in CPO prices will hurt earnings in 2H08. (hedging policy)
We have lowered our average selling prices for the year to RM3,100 per tonne, from RM3,300 per tonne, after taking into account the current price drop. This shaves about 8% off our earnings forecast, to RM432 million in 2008. Going forward, we are keeping our earnings pretty much intact, for now.
Given the prevailing bearish sentiment, its shares appear fairly valued at roughly 10.3 and 11.9 times our estimated earnings for 2008-2009. Hence, we are downgrading our recommendation from BUY to HOLD. Sentiment for plantation stocks as a whole will likely stay weak.
The company’s underlying fundamentals remain intact. It is sitting on net cash pile of some RM524.3 million at end-1Q08. Asiatic new land bank acquisitions and planting up in Indonesia will underpin growth over the longer-term. Its biotechnology venture should also yield returns beyond 2012.
No comments:
Post a Comment