Oil from the palm fruit (above) is edible as well as convertible into bio-diesel.
STOCK PRICES of oil palm plantations like First Resources, Golden Agri, IndoAgri, and Wilmar have crashed since July along with crude palm oil prices, but Goldman Sachs and UBS believe CPO prices will rebound soon.
Other than acreage of mature estate and yield, the earnings of an oil palm plantation depend on crude palm oil prices, which dropped sharply in the past two months for two reasons:
Firstly, crude petroleum prices plunged from a historic high of over US$145-a-barrel during on 3 July 2008 to dip below the US$100 psychological mark over the last weekend.
Prices for crude palm oil, which can be converted into bio-diesel, fell in tandem as both are pegged to petroleum prices.
Secondly, relatively high inventory levels of crude palm oil also dampened prices.
Helped by abundant rainfall this year, the large acreage of palm oil plantations in Malaysia that are mature for harvesting boosted global production.
Global crude palm oil production is expected to grow 12.3% this year (2007: 4.1%) to 41.3 million tons, according to Oil World.
Crude palm oil price rebound
Crude petroleum price down by a third in past two months.
From its last close price of about US$650 a ton, Goldman Sachs and UBS believe crude palm oil prices are going to rebound to US$900-US$1,100 in 2009.
Reasons cited include
1) Long-term structural demand for bio-diesel
Bio-diesel is made from vegetable oils and does not contain fossil fuels. It can be used in pure form or may be blended with petroleum diesel at any concentration in most modern diesel engines.
Demand is currently mainly from Europe, where some nations have introduced mandatory blending.
Indonesia and Malaysia, which jointly produce 85% of the world’s palm oil, will introduce mandatory blending of up to 2.5% bio-diesel content this year.
Further, crude palm oil can now be processed into bio-diesel for less than fossil diesel, according to Goldman Sachs.
2) Tighter inventories for competing bio-diesel crops – soybean and corn
Crude palm oil price crashes in tandem with crude petroleum from the later's July 2008 peak.
The USDA projects US soybean inventories to stay at critically low levels in 2009 and corn inventories to decline sharply.
If yields disappoint due to floods that happened in Mid West America this year, high soybean and corn prices could cause demand for bio-diesel blend stock to switch to crude palm oil.
3) Crude palm oil production to slow
After 2008’s high yield season, palm oil plantations are expected to demonstrate biological yield stress as the trees conserve energy.
This means inventory levels are expected to fall in 2009.
Foreign brokers pick plantation stocks like Wilmar and IndoAgri
Given the positive price outlook for crude palm oil, current market valuations of plantation stocks are mis-priced, according to Goldman Sachs.
Among mid-caps, IndoAgri is its preferred buy, with a 12-month price target of S$2.40 based on 9X FY09PE.
A long-term crude palm oil price of US$600 a ton would be sufficient to justify a stock price of S$1 for IndoAgri, says the US investment bank.
If so, IndoAgri's last close price of 71.5 cents works out to a 30% discount from immediate fair value.
Its top pick for the plantation sector is the large cap Wilmar: 12-month target price of S$4.90 based on 16X FY09PE, implying a 60% upside from Wilmar’s last close price of S$3.07.
UBS also recently issued a buy call on IndoAgri, an upgrade from its previous neutral rating, citing the recovery of crude palm oil prices as a stock price catalyst.
Its valuation for IndoAgri is at 10.2X FY08PE, translating to a price target of S$1.38.
| OIL PALMPLANTATION STOCKS | StockPrice | Mkt Cap S$mln | SalesS$mln | Historic PE |
INDOFOOD AGRI | 71.5 cts | 1,035.2 | 985.9 | 3.7 |
| WILMAR | S$3.07 | 19,604.0 | 23,610.8 | 7.6 |
| FIRST RESOURCES | 38.5 cts | 565.4 | 256.3 | 6.3 |
| GOLDEN AGRI | 33 cts | 3,292.0 | 2,686.2 | 1.0 |
Recent story: INDOFOOD AGRI: Why 7 brokers have 'buy' or 'outperform' calls
