If you were to read the latest sector reports on CPO, you'd get probably 70% neutral/under weight calls on the sector. The sharper investors would have noted that the outlook of the sector is better than most would think. Selective smaller players have been improving their yields and margins. Genuine corporate exercise to create value and add liquidity have boosted some of the related counters. 
The Rimbunan Sawit story has not ended, although the cream of the best returns may be buying just before the recent corporate exercise. Still one cannot and should not deny the compelling valuations still. The most undervalued stock on KLSE is probably Jaya Tiasa, and possibly the most illiquid as well. Its transformation into a CPO centric cum timber play has not registered in most investors' radar. But the illiquidity is barring investors from having a reasonable exposure.
SOP is another recent giant killer. The profits have been superb. The recent 9 months profits almost doubled from the previous 9 months. Again the cream of the return would have been buying around RM4.50 a few weeks back, still there should be another ringgit in it.
Its Not All About The CPO Price
Many are maintaining CPO forecast at RM2,850-3,000/t for 2012E based on a weak global outlook. On a sustained global recovery, CPO price could overshoot with upside of up to RM3,200-3,400/t.
CPO is also correlated to the other soft commodities such as soyabean, even corn and wheat. That has been missing from a lot of analysis. We can expect soy oil and CPO prices to be well supported due to supply constraints issues from related crops due to lower production from US and China as well as potentially lower soybean planting in the Mar-31 US planting intention as corn wins more acreage. 
Moderation in CPO supply growth from 9% in 2011E to 4% in 2012E due to reversal in the biological yield upcycle, further exacerbated by La Nina conditions. Analysts have been too timid and cautious in their estimates of effectes of La Nina, and overplaying the impact from E.U. crisis.
Downside risk includes the removal/scale back/delay of bio-fuel mandates/subsidies; Non renewal of US subsidies for ethanol and bio-diesel which expires in Dec-11, will cap upside /soften edible oil prices;
Valuation Implied Currently
The implied CPO price at current levels for most listed CPO counters is RM2,600-2,700/t. Hence all things being equal, the entire sector is overdue for an upgrade of at least 10%. The solid results from mid-smaller players have encouraged more foreign funds, we can expect confidence to return more convincingly. Foreign shareholding level has been slowly rising, from 15.3% in Dec-10 to 17% in Dec-11.
I see a weaker growth in SEA palm oil production and normal demand expansion which will set the stage of a bull market in 1H2012. I would not be shocked if Malaysian palm oil will hit RM3,600-3,800 by June 2012 on strong demand chasing tight supply. CPO prices is going to RM3300 in January/Feb on output made worse by top producers Indonesia and Malaysia entering a flat phase in the oil palm biological cycle tht lasts between 6-9 months.
Analysts Revising As We Speak
I know of a couple of houses about to revise their sector outlook positively even as I write this. This should be an excellent time to load up on plantations. Several positive factors are emerging that might encourage investors to turn bullish on palm oil stocks. The first factor is the weather, specifically, flooding brought about by high rainfall because of the La Nina effect, which might cause production to drop. Just as an indicator, the most recent La Nina in January and February this year, caused production to drop by up to 40%. Typically, a hectare can yield between 1.8 and 2 tonnes of so-called “fresh fruit bunch” (freshly harvested palm oil fruits, before processing). During the last La Nina, this measurement fell to between 1.15 and 2 tonnes per hectare.
Still on the positive side, if OilWorld, an industry research bureau, is correct, global demand for crude palm oil is expected to grow over the next 12 months by 6.8% on year. By contrast, global production is only expected to increase at a slower pace of 4.9%. According to forecasts by OilWorld, the biggest demand growth will come from Indonesia, with an expected demand of 6.82 million tonnes for 2011-2012, up 12.4% compared to the likely 6.07 million tonnes for 2011. Malaysia’s consumption is also expected to grow strongly: up 15.9% between 2011 and 2012, reaching 2.28 million tonnes.
The current La Niña weather pattern has been causing very hot and dry weather in South America which has lead to a late rally in the grain markets after decreased global demand had been driving commodity prices lower.
Soft Commodities Prices
If you note the charts of the 3 soft commodities, it is all perking up with strong volume growth over the last few weeks. Birds of the same feather, people.
http://futures.tradingcharts.com/chart/ZW/
Why IJM Plantations
1 | IJM Corporation Berhad | 441,832,715 | 55.11% |
2 | Citigroup Nominees (Tempatan) Sdn Bhd | 101,257,219 | 12.63% |
3 | Desa Plus Sdn Bhd | 37,000,000 | 4.62% |
4 | HSBC Nominees (Asing) Sdn Bhd | 23,109,268 | 2.88% |
5 | Amanahraya Trustees Berhad | 20,334,100 | 2.54% |
6 | SG Plantations (Sabah) Sdn Bhd | 19,953,947 | 2.49% |
7 | Sakilan Desa Sdn Bhd | 17,040,000 | 2.13% |
8 | Malaysia Nominees (Tempatan) Sendirian Berhad | 13,902,943 | 1.73% |
9 | Citigroup Nominees (Asing) Sdn Bhd | 7,719,971 | 0.96% |
10 | Amsec Nominees (Tempatan) Sdn Bhd | 6,576,502 | 0.82% |
| 2011/2012 Quarterly Financial Highlights:- |
| Click on the respective quarters to view the Financial Result Announcements (PDF format) | 2011 | 2012 | |||||
| 1st Qtr (75 KB) | 2nd Qtr (77 KB) | 3rd Qtr (81 KB) | 4th Qtr(162 KB) | 1st Qtr 67 KB) | 2nd Qtr (66 KB) | ||
| OPERATING REVENUE | RM'000 | 113,255 | 133,633 | 160,426 | 98,970 | 128,351 | 180,933 |
| PROFIT BEFORE TAX | RM'000 | 38,768 | 64,692 | 59,830 | 32,726 | 66,387 | 62,880 |
| PROFIT ATTRIBUTABLE TO OWNERS OF THE COMPANY | RM'000 | 29,895 | 47,336 | 44,045 | 25,915 | 49,474 | 46,883 |
| ISSUED SHARE CAPITAL | RM'000 | 400,672 | 400,672 | 400,673 | 400,673 | 400,856 | 400,857 |
| SHAREHOLDERS FUNDS | RM'000 | 1,193,768 | 1,234,914 | 1,270,240 | 1,306,017 | 1,291,837 | 1,352,330 |
| TOTAL ASSETS | RM'000 | 1,413,213 | 1,432,302 | 1,495,842 | 1,504,282 | 1,568,042 | 1,567,551 |
| EARNINGS PER SHARE (Basic) | Sen | 3.73 | 5.91 | 5.50 | 3.23 | 6.17 | 5.85 |
Today, IJM Plantation rose 11 sen with 3.622 million shares traded, a highly significant jump if you are a value momentum trader.
| 03/01/2012 | 2.82 | 2.81 - 2.85 | 2.85 | +0.03 (1.06%) | 578,300 |
| 30/12/2011 | 2.81 | 2.81 - 2.83 | 2.82 | +0.01 (0.36%) | 1,243,300 |
| 29/12/2011 | 2.81 | 2.78 - 2.82 | 2.81 | 0.00 (0.00%) | 250,700 |
| 28/12/2011 | 2.80 | 2.78 - 2.81 | 2.81 | +0.01 (0.36%) | 11,100 |
| 27/12/2011 | 2.82 | 2.80 - 2.80 | 2.80 | -0.02 (0.71%) | 3,500 |
| 23/12/2011 | 2.79 | 2.78 - 2.85 | 2.82 | +0.03 (1.08%) | 694,800 |
| 22/12/2011 | 2.78 | 2.77 - 2.80 | 2.79 | +0.01 (0.36%) | 63,500 |
| 21/12/2011 | 2.76 | 2.76 - 2.78 | 2.78 | +0.02 (0.72%) | 26,400 |
| 20/12/2011 | 2.80 | 2.76 - 2.80 | 2.76 | -0.04 (1.43%) | 505,800 |
IJMP currently has a total landbank of 78,116ha and a total planted landbank of 38,805ha with an average age of 9.4 years as at 31 Mar 2011.
NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
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