HwangDBS goes Overweight on Planters

Got this copy of report on HwangDBS commentary on the plantation sector from a pal.

• OVERWEIGHT KLCI : 1,173.2
  
  A dichotomy in the making
  Trading at a deep discount. Plantation stock movements have recently been more akin to the broad market indices rather than their intrinsic values. This, we believe, might be due to reassessment of market risks and to a certain extent, fears that a weak US economy could translate into a correction in commodity prices. The fact is palm oil price momentum had remained strong relative to our assumptions. YTD CPO futures prices for March 2008 delivery averaged RM3,471/ton, even after accounting for the sharp correction in the past week. CPO prices may need to drop further to around RM2,800 to match our full year average of RM3,100/ton. But even based on these assumptions, plantation stocks are still trading at a deep discount. While it is true that most of the other stocks are also trading at attractive levels relative to our target prices, we believe that the gap for plantation stocks is too big to ignore.
  
  Well timed correction in CPO prices. We believe CPO futures’ recent surge past the RM4,200/ton mark had more to do with speculation of a jump in Chinese demand – largely following the soybean complex – rather than a significant jump in demand. Indeed, over the past six months, protests against rising food prices in several countries meant two things:
  
  1. The governments of consuming countries would have to better manage supplies of oilseeds and vegetable oils to cushion the external price shocks (refer to our Plantation Sector report dated 14 February 2008); and
  
  2. Excessive price drops are unlikely, since demand should pick up again as soon as that happens. In the near term, CPO and soybean oil prices may have some more room to correct because their prices have moved ahead of other vegetable oils. But to the same level of YTD appreciation of competing oils, primarily rapeseed oil.
  
  IOI Corporation is an integrated plantation with one of the highest yields in Malaysia, one of the largest oleochemical manufacturing capacities in the world, and recently expanded into Indonesia. IOI is favored for its active capital management and ROE in excess of 20%
  
  IJM Plantations is a large-cap pure plantation play operating in Sabah. It has 57,472 hectares of plantation landbank – around 26,500 hectares of which are located in Kalimantan, Indonesia.
  
  KL Kepong’s management is known to be conservative. Growth for this stock had been gradual but steady. KLK has a strong balance sheet and is expected to have net cash of RM720m (67 sen per share) by end FY08F for future expansion.
  
  Sime Darby is a GLC conglomerate with businesses in plantations, property, heavy equipment, motor vehicle, energy and utilities. It is the largest listed by planted area, largest property by landbank and potentially the owner of Bakun Hydroelectric Plant
  
  TSH Resources is a small cap play benefiting from aggressive acquisitions in Indonesia since 2004 that provided immediate volume growth. TSH earnings are also from wood flooring, cocoa processing, carbon credits, and a 800k MT p.a. refinery (50:50 JV with Wilmar).

Here is a snapshot their price targets.

• Reiterate Overweight call. We are keeping our CPO price forecast of RM3,100/ton for this year, RM2,800/ton for next year and RM2,650/ton for 2010. Bear in mind that our valuations are based on DCF from FY09F onwards. This means that the current share prices are implying bleak CPO price outlook and ignores long-term earnings expectations from volume growth.
  
  We maintain our Overweight rating for the sector, as we do not expect plantation operations to be affected by the outcome of the election; the main drivers remain global pricing and export-driven volume growth.
  
  Following the recent drop in share prices, all the plantation stocks under our coverage are trading at deep discounts to their respective fair values. IOI Corporation’s valuations are undemanding, while KL Kepong and IJM Plantations look attractive given that they should book good earnings over the next four quarters. We also upgrade Sime Darby to Buy (from Hold) as the share price has dropped by 21.7% since we downgraded the stock to Hold on 28 February. Our price target is now adjusted to RM12.40 from RM12.60, after factoring in lower multiples for property (down to 10x from 13x) due to potential delays in project launches and the impact of its current litigation case in Indonesia, which we estimate could cost the company RM122m (c. 4% of FY08F earnings). We believe the discount that Sime Darby is trading at now is too large to ignore. For small caps, we still like TSH Resources.
  
  For Singapore, we are reiterating our Buy call for Wilmar International; and for Indonesia, we recommend Bakrie Sumatra Plantation and London Sumatra Indonesia for significant upsides to our target prices

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