Friday, September 2, 2011

OSK Research sees plantations set for a rally

KUALA LUMPUR: OSK Research expects a run up in palm oil prices which will luft the prices of PLANTATION [] stocks in the short term.

It said on Friday, Sept 2 that soybean price ran up as high as US$14.56 per bushel, taking out its 2011 peak at US$14.20.

OSK Research said soybean price is now at its highest level since mid 2008 as adverse weather in the US threatens to lower yield.

Quoting the International Grains Council, it said the unfavorable hot and dry weather and lower acreage will lower the US's soybean production by 8.2% to a three-year low of 83.2 million tonnes. Soybean oil also moved in tandem, touching a high of 58.68 US cents per pound but has yet to make year-high.

'The rally has widened palm oil's discount to soybean oil to US$249 per tonne. In 2008 when flood in the US Midwest threatened yields, the spread widened to as much as US$400 per tonne.

'Despite the spread widening, we believe palm oil price will be pulled along, especially when palm oil yield in Indonesia and Malaysia is also under threat,' it said.

OSK Research said although it did not expect soybean price to run up so soon, it was a matter of timing as soybean planting in North America this season will have an increase of frost risk due to the late completion of planting, which leads to later harvesting. 'The rally also supports our thesis of a short-term rally in palm oil price possibly up to RM3,500 to RM3,600 per tonne levels. This is despite palm oil price falling below the RM3,000 levels as we saw no follow through selling below that level, which tells us that palm oil price will not stay below RM3,000 for long,' it said.

OSK Research said with financial results of plantation companies in the June quarter being satisfactory and forecasts having been broadly upgraded, it'' believed plantation stocks were poised for a rally.

'We like fairly liquid names such as Golden Agri (Buy, FV S$0.89), First Resources (Buy, FV S$1.68), London Sumatra (Buy, FV 3,096 rupiah) and Kulim (Buy, FV RM4.45) for the purpose of this short term rally.

'We continue to believe that 2012 average palm oil price will be lower than 2011 hence most companies will still experience a decline in earnings in the mid term. Nevertheless, a run-up in palm oil price, should it occur as we expect, will still lift the prices of plantation stocks in the short term,' it said.

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