Thursday, March 20, 2008

Buying Opportunity for Planters?

Highlighted on the Business Times: Commodity Roundup: CPO futures sharply lower


    CRUDE palm oil (CPO) futures prices on Bursa Malaysia Derivatives ended sharply lower on weak demand yesterday, dealers said.

    Market sentiment was also subdued ahead of the public holiday today, one of the dealers said.

    The fall in soyoil futures on the Chicago Board of Trade also weighed down market sentiment for CPO, he said.

    At close, April 2008 declined RM89 to RM3,344 per tonne, May 2008 eased RM105 to RM3,345 per tonne, June 2008 went down RM120 to RM3,330 per tonne and July 2008 dropped RM119 to RM3,320 per tonne.

    Turnover was lower at 17,935 lots from 21,356 lots on Tuesday while open interest declined to 41,228 contracts from 43,406 contracts.

    On the physical market, March South was lower at RM3,400 per tonne from RM3,450 per tonne previously.

However, highlighted on the Star Business: 2nd-tier planters in for a rebound

  • Second-tier plantation stocks on Bursa Malaysia are expected to rebound soon on short-term speculative buying, analysts said.
  • The major beneficiaries of the recovery include Sarawak Plantations Bhd, Sarawak Oil Palms Bhd (SOP), Rimbunan Sawit Bhd, TH Plantations Bhd, IJM Plantations Bhd, Tradewinds Plantation Bhd and TSH Resources Bhd.
  • The price of crude palm oil (CPO) has retraced by about 30% to RM3,390 per tonne to date from a record RM4,486 per tonne. However, Aseambankers, in a recent report, said it is “not ruling out the possibility of another round of speculative buying stemming from the US Fed interest rate cut.”

Two issues.

1. Does the current sell down creates a buying opportunity, given the fact that despite the current plunge in the CPO futures, based on the current ASP (Average Selling Price) sold by our planters , represents insane profits?

2. If so, why 2nd-tier planters? If this indeed is a buying opportunity, why don't one focus on market leaders? Market leaders lead. 2nd-tier will be 2nd-tier.


Which brings me to this article posted on Singapore Business Times, Can plantation stocks hold out?, which I feel is an excellent second opinion on this issue!

  • FIRST came the spillover effect from market fears that the assets of Indonesian oil palm producer First Resources would be auctioned off. Now, plantation stocks - and these include First Resources - have been dealt another blow as the price of crude palm oil (CPO) plunged on Tuesday.

    It seems that the earlier optimism surrounding these stocks has quickly dissipated upon a loss of support from CPO prices. But is the selldown really justified, or are short-term fears clouding the good growth stories that these stocks offer?

    Though most of these counters have recovered some ground from Tuesday's plunge, it now seems that the earlier knee-jerk reaction has thrown ice on previous propositions that this sector could weather a market downturn well.

    Some analysts, however, believe that the valuation of Singapore-listed CPO players has gone down to levels where investors can start to do bargain-hunting. There are good reasons for their optimism. After all, should investors peek through the smoke of market volatility and fear and look at the fundamentals, this sector has some compelling stories.

    Before the CPO price shock, some good news appeared to be surfacing at Wilmar, which has submitted a request to the Chinese government to raise its branded cooking oil price. The Chinese government wants to increase supplies after price controls imposed in January cut the retail stockpile and has asked Wilmar, among other companies to increase consumer sales.

    For Indofood Agri, the integration with Lonsum, a listed company in Indonesia in which it bought a majority interest, is expected to provide a significant near-term catalyst for the company, given the possibilities for cost savings and the pooling of expertise, according to Macquarie Research.

    Things are also looking brighter for First Resources now, after fears of an output cut this year were allayed when it clarified that its founder and former shareholder Martias had fully paid off damages of US$38.3 million and that Indonesia's Corruption Eradication Commission has withdrawn its intention to auction off three of First Resources' plantation and milling assets that were deemed to be related to Martias.

    In addition, the earnings growth outlook for these CPO players remains robust. For instance, analysts' mean earnings estimate for First Resources stands at 1.19 trillion rupiah (S$177.7 million) for FY08, up from 431 billion rupiah for FY07. For Wilmar, the estimate is US$870.9 million, up from US$580.4 million for FY07. And for Indofood Agri, it's 1.66 trillion rupiah for FY08 compared to 889.1 billion rupiah a year ago.

    But in the face of fears and a loss of market confidence, these prospects can end up being overlooked.

    That is the disconnect happening in the plantation sector - even if CPO prices and earnings are still on the rise, fears of heightened risks can continue to choke share prices.

    This is reflected in UOB KayHian's view on the sector. Despite higher CPO price assumptions and earnings forecasts, it is keeping an 'underweight' rating on Malaysia's plantation sector, citing political uncertainties, higher sector risks from high CPO prices, huge inventories and government intervention, as well as demand risks from biodiesel losing its shine.

    Rising risks in this sector would naturally point to lower PE valuations and hence, further downside. But it remains to be seen if such a lacklustre view of the Malaysian plantation sector will trigger a reassessment of Singapore-listed plantation plays as well.

    While earnings visibility remains clear and balance sheets remain fundamentally sound, these factors could pale in the face of further knee-jerk reactions to volatile CPO prices and fears of heightened risks.

    And it is unclear if good news from this sector is now enough to make jittery investors take another look. But if analysts' buy calls can still be counted on, it may pay to take a closer look at stocks that are trading below or close to 10 times forward PE - stocks such as First Resources, Indofood and Golden Agri.

More worrying is the immediate weakness in several commodities. Gold Leads Commodities Plunge on Outlook for Dollar, Economy

  • March 20 (Bloomberg) -- Gold headed for its biggest weekly drop in 25 years, leading a drop in commodity prices, after the dollar rallied and concern mounted a U.S.-led slowdown in the global economy will reduce consumption of raw materials.

    Oil fell below $100 a barrel for the first time since March 5, soybeans dropped for a second day and copper had its biggest two-day decline in seven months. The UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials is having its worst week since at least 1997, led by declines in soybeans, cocoa and cotton.

    There is ``a glaring divergence between escalating commodity prices and waning world economic growth,'' James Steel, an analyst with HSBC Securities in New York, wrote in a report e- mailed today. It is ``no longer assured that commodity price appreciation is a safe one-way bet.''

    Gold in London has plunged 12 percent from its record $1,032.70 an ounce on March 17 after the Federal Reserve cut its overnight-lending rate less than expected by 75 basis points to 2.25 percent. The dollar has recovered 2.8 percent from an all- time low against the euro and rallied 4.6 percent from a 12-year low against the yen.

    Commodities have advanced in each of the past six years, driven by demand from China seeking to feed its population and power its expanding economy. The dollar's slide has boosted demand for raw materials, which become cheaper for buyers holding other currencies, while some investors are seeking higher returns following a slump in equities


If commodities all over are correcting or plunging in a drastic manner, then perhaps isn't it much better to adopt the side lines approach?

As mentioned in the Bloomberg article.

  • `Absolutely Enormous'

    The money flowing into commodities is ``absolutely enormous,'' James Proudlock, commodity product head for Europe, Middle East and Asia at JPMorgan Securities Ltd., said at a sugar conference yesterday in Geneva.

    There are 361 commodity funds that had $98 billion in assets as of Feb. 28, compared with 345 funds with $80 billion at the end of 2007, he said.

    The rally, according to Paul Touradji of the $3.5 billion hedge fund Touradji Capital Management LP, was a ``buying orgy'' that had inflated prices and increased the risks of a collapse.

    Commodities ``have all gone parabolically higher on frenzied money flow,'' New York-based Touradji wrote to clients March 10. ``Unless that money flow continues ad infinitum, in which case prices would go to infinity, then the fundamentals had better be improving as quickly as prices have been, otherwise there is nothing else to keep the markets at these levels.''

Which is rather confusing for most. A Falling Dollar Should Contribute More Strength to Commodities

  • A falling dollar should also contribute more strength to commodities. But yesterday gold and oil fell quite a bit. What gives?

    The dollar had a rare moment of inspiration. It was delusional inspiration, won't last. Besides, commodities have other reasons to go up than dollar weakness. Our French technical and currency guru, Gabriel Andre, explains:

    "Commodities are negatively correlated with the US dollar, and in the short-term the US dollar is oversold. Many traders feel the Fed has played its hand fully, and see this as a reason to buy back into the dollar…in the short term, that is.

    "But with cheaper commodities, there are likely to be bargain-hunting investors looking for a good entry point into the market. Further down the track, strong demand from Asia for real goods is likely to continue. Tangible assets still have the wood over financial assets…so cheaper commodities will generate more buyers, particularly in gold.

    "A fall in gold gives it buying strength, technically…and it will enjoy fundamental demand from those wishing to hedge against an inflation and the long-term dollar weakness."

Posted on, Commodity Market's Roiling Riptides Of Prices

Posted on Reuters. COMMODITIES-Crumble on Global Flight from Risk

And the following posting is worth reading: DELEVERAGING- Gold and Commodities Teetering on the Brink of a Bear Market?

The author, Nadeem Walayat, asks the following.

  • Gold and other commodities plunged below key short-term support levels following Tuesdays US Interest rate cut to 2.25%. The consensus seems to see this as a healthy correction or is this a signal for a potential end of the commodities bull market?

He continues.

  • Gold and Commodities are NOT immune to the impact of deleveraging, as evident by the sharp drop in Gold yesterday

Are we seeing deleveraging?

What say you?