Plantation Sector

Palm oil price continued to weaken with the improved production outlook in 2H thisyear. At the same time, exports have been weak, suggesting that the current palm oilprice is excessive and will inevitably lead to demand destruction.

OSK believes that palmoil price already hit a peak in the 2008 – 2011 upcycle and is now in a downcycle, whichwill last some 6 to 9 months at the very least. As there have been no fresh catalysts tospur palm oil price further, prices have to correct to a level where demand starts tokick in. Maintain Neutral on the sector with selective Buys.

Below are the target prices and ratings for selected plantation stock.

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OSK believes that the share prices of plantation stocks may have peaked even though palm oil price may continue to stay relatively firm due to the current supply tightness. The decline in plantation stock prices of late may signify that they are in the PE multiple compression phase, which occurs at cycle peaks.

OSK views that the equity price action as a signal that palm oil supply will strengthen in 2H and the current CPO price strength as being unsustainable. Given the recent strength in CPO price, we have raised our CPO price assumption to RM3200 for CY11 from RM2700 previously but have factored in lower PE multiples in arriving at the target prices of plantation stocks given the potential CPO price decline. OSK maintains a Neutral call on the sector.

Below are the target prices and ratings for selected plantation stock.

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Malaysia’s palm oil inventory started to decline last month as production began on a seasonal downcycle. This, plus the still tight supply in 1H next year, should keep prices relatively firm and give plantations stocks the opportunity to appreciate further.

However, with recent rainfall seeming ordinary, we believe a bumper crop is in the making and we would see strong production from mid-2011 onwards. This may put an end to the current palm oil price upcycle, which is already more than 2 years old. Maintain Neutral on the sector.

Below are the target prices for selected plantation stock.

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