CPO prices surge higher

Crude palm oil (CPO) prices have been trending steadily higher in recent weeks, having recovered quickly from the bout of weakness back in early July 2010.

Prices averaged just under RM2,720 per tonne in August and September 2010, well above the average of roughly RM2,530 per tonne in the preceding seven months of this year.

This week, CPO futures traded on the Bursa Derivatives surged above RM2,900 per tonne, the highest levels recorded since hitting all-time highs back in mid-2008, in step with rising soya oil prices.

Prices are likely to stay resilient
Whilst there remains some uncertainty as to the pace of economic growth, it appears that CPO prices will be well supported around the RM2,500-RM2,600 per tonne levels — if not trend higher — in the foreseeable future.

Case in point, CPO futures remained resilient last month despite stockpiles in August jumping to 1.7 million tonnes, from a low of 1.4 million tonnes in July. In the Malaysian Palm Oil Board’s (MPOB) latest monthly release, stocks in September rose marginally to 1.71 million tonnes. On the positive note, exports recovered smartly after falling in August.

Last week, the MPOB predicted flat production growth for the country this year, due to bad weather conditions and stagnant palm oil extraction rates.
Indeed, increasingly unpredictable, and often extreme, weather patterns is likely to continue to threaten global production of grains and oilseeds, causing short term price volatilities.

More importantly, steady growth in underlying demand, underpinned by the world’s growing population and per capita consumption in emerging economies, is expected to support prices over the longer term.

SOP appears attractively valued
Stronger CPO prices would bode well for plantation companies. Still, with average valuations on the high side, which is partially skewed by the bigger players, investors are understandably cautious on picking up stocks in the sector.

In this respect, Sarawak Oil Palms (RM2.90; SOP) appears to be among the more attractively valued plantation stocks at the moment.

Net profit grew compounded 46.5% pa from 2005 to 2009
SOP has done very well over the past few years, growing its net profit from RM23.1 million in 2005 to RM106.5 million in 2009. That is equivalent to a compounded growth rate of 46.5% per annum.

We estimate earnings will improve further to roughly RM120 million this year — on the back of both higher CPO selling prices and output. SOP’s selling prices averaged at about RM2,141 per tonne in 2009, well below our forecast of RM2,500 per tonne for the current year.

The company’s CPO output in 1H10 was down by about 2.4% year-on-year (y-o-y), affected by unfavourable weather conditions earlier in the year. Positively, current crop trend suggests a strong recovery in 2H10.

Indeed, production in 3Q10 was up 25% y-o-y. The strong pickup in the last three months lifted its year-to-date output growth back into positive territory. For the first nine months of the year, CPO production was up about 8% over the previous corresponding period. Even assuming a more conservative output in the final quarter of the year, we estimate overall growth of 4%-5%, at least, for 2010.

Increasing planted acreage and young oil palm trees
Looking ahead, we expect fresh fruit bunches (FFB) output will continue to increase — boosted by the company’s landbank expansion and new plantings over the past few years. Its high percentage of young oil palm trees will support future production — and earnings — growth.

SOP has been acquiring land — all in Sarawak — for oil palm development over the past few years. Total landbank increased from 45,698ha in 2005 to 72,653ha at the end of last year. Over the same period, planted acreage rose from 29,982ha to 54,252ha.

As at end-2009, some 42% of the planted trees are still immature but will start producing over the next few years. About 38% of its planted landbank comprises of young trees, aged between four and 10. These will be entering prime production ages, giving the company a twin boost to FFB output growth.

Currently, SOP still has some 18,400ha of unplanted landbank, including reserves. It is in the midst of finalising the acquisition of an additional parcel of land measuring some 3,380ha. With new plantings estimated to average around 4,000ha per annum, the company will stay busy for the next couple of years.

In step with the expected increase in FFB, SOP intends to expand its milling capacity — to add another two mills by 2013. At the moment, it runs four palm oil mills with capacity totaling 285 tonnes per hour.

SOP has a relatively clean balance sheet. Net debt was marginal at just about RM2.2 million at end-June 2010. Nevertheless, the company has no intention to substantially up its dividend payments given its expansionary plans. Gross dividends totaled three sen per share last year, which is equivalent to a profits payout of roughly 9%. Assuming net dividends of three sen per share this year, yield is estimated at about 1% at the prevailing share price. — InsiderAsia


Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.


This article appeared in The Edge Financial Daily, October 13, 2010.