TRADEWINDS PLANT,Fall in 2Q op margin not as severe as others

21 August 2008
SELL
RM2.45
Target Price: RM2.10


YE to Dec FY08 FY09F FY10F FY11F
FD EPS (sen) 19.9 29.7 21.0 19.8
FD PE (x) 12.3 8.2 11.7 12.4


Tradewinds Plantation Bhd’s (TPB) 1HFY08 results are within expectations. However, as CPO prices are currently hovering between RM2,400/tonne to RM2,600/tonne, it is likely that the average selling price would fall short of our assumption of RM3,500/tonne for FY08F.

Like other plantation companies, TPB benefited from higher CPO (crude palm oil) price and output in 1HFY08. As a result, turnover expanded 65.9% YoY to RM393.4mil in 1HFY08. According to MPOB (Malaysian Palm Oil Board) statistics, average CPO price was RM3,517/tonne in 1HFY08, 62% higher than the average of RM2,174/tonne realised in 1HFY07.

TPB also recorded an increase in CPO production in 1HFY08. FFB production rose 9% YoY to 503,043 tonnes in 1HFY08 while CPO output expanded 4% YoY to 96,433 tonnes.

In comparison with 1QFY08 against 2QFY08, TPB’s turnover showed only a marginal increase as stagnant CPO prices were compensated by higher CPO production. Based on MPOB statistics, average CPO price was RM3,512/tonne in 2QFY08 versus RM3,522/tonne in 1QFY08. TPB’s CPO output climbed 4.2% from 47,213 tonnes in 1QFY08 to 49,220 tonnes in 2QFY08.

Surpringly, the QoQ erosion in TPB’s operating margin in 2QFY08 was not as severe as other plantation companies. EBIT margin only shrank from 38.7% in 1QFY08 to 37.9% in 2QFY08.

We maintain a SELL on TPB due to uncertainties in CPO prices. Global demand may not catch up with the growth in vegetable oil supply while the downward trend in crude oil prices would most likely drag vegetable oil prices.