Plantation: Protectionism would distort CPO prices

Demand destruction would be the key factor for 2H09. We are starting to see the introduction of protectionism in emerging countries to safeguard domestic industries. By UOB Kay Hian Research.

Russia, which is only a small player in the palm oil market, accounting for 2-3% of global demand has decided to impose import duty on palm oil. The move could be the start of protectionism in emerging countries which is negative for palm oil for the following reasons:

Emerging countries are the main target markets for palm oil
China, India and Pakistan accounted for 30% of total palm oil consumption in 2008. If others start to follow suit, demand could contract in 2009, vs our current expectation of slight growth of 3m-4m tonnes for 2009.

Palm oil all-in prices have to be lowered to stay competitive
As the discount gap to soybean oil and rapeseed oil has narrowed to the usual level and to stay competitive, palm oil price has to be lowered to factor in the import duty at the recipient countries. Crude palm oil (CPO) price weakness is expected to come in 2H09.

India demand to slow
We expect potential demand destruction from India due to excessive buying since Nov 08. India is overstocking at this point in time. Indian port stocks of palm oil were unusually large at about 500,000 tonnes as of 31 Mar 09 (usual: 300,000 tonnes). Thus, palm oil purchases from India are likely to slow down.

Next in line could be the reintroduction of import duty by Indian government
It was reported that India will continue with its duty-free vegetable oil imports, but we still think a small import duty could be reintroduced after the new government is formed in Jun 09. With refining margin narrowing, there could be louder protests from refiners seeking the re-introduction of import duty to protect local refiners. Before the abolishment, CPO was taxed at 20%.

RECOMMENDATION: Maintain OVERWEIGHT
Although we expect CPO price to weaken in 2H09, we still see value in Indonesia-based plantation companies based on our CPO price assumption of RM1,800/tonne. We have a few selective buy calls and our top picks are Wilmar (Target: S$3.50), Astra Agro Lestari (Target: Rp16,800) and Sampoerna Agro (Target: Rp1,700). For investors looking for exposure to Malaysia-listed plantation stocks, we see potential value in some laggards like Hap Seng Plantation, which is trading at 2009 and 2010 PEs of 9.1x and 8.9x (based on consensus EPS of 20.7 sen and 21.2 sen) respectively.












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We have based this document on information obtained from sources we believe to be reliable, but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Expressions of opinion contained herein are those of UOB Kay Hian Research Pte Ltd only and are subject to change without notice. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of the addressee only and is not to be taken as substitution for the exercise of judgement by the addressee. This document is not and should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell any securities.

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