Investment summary
CPO price had climbed to its highest in the last 6 months on optimism of recovery of global demand and lower inventory levels. Although we are positive on the sectors long term outlook, we think recent run-ups may have been too steep and may see some correction in the next couple of months due to: (1) Peak CPO production period between May-Sept; (2) New supply from soybean harvest season in South America; (3) CPO-soybean oil price difference had narrowed to RM544/mt; (4) Recovery in CPO price had outperformed the market and crude oil price by 55% and 11%. We remain positive on the plantation sector: (1) Supply side discipline due to tree stress, MPOB replanting incentive and slower expansion plans; (2) Demand is on the rise on the contrary to the global economic slowdown due to higher exports to China, India and Pakistan; (4) Signs of global economic recovery in 2010 is gaining ground. Stick to purer CPO plays and trade the CPO volatility. Our top pick is Asiatic and IJMP. KLK is our preferred stock for large cap exposure while BIRT and Kulim are our dividend yield and value pick.
Stocks to watch
CPO prices had reached our long term CPO assumption of RM2,200/mt earlier than expected and has outperformed the KLCI and crude oil recovery. Take profit into the rally and relook at entry below RM2,000/mt CPO price. Trade within the band of RM1,800-RM2,200/mt CPO price. Prefer to trade mid-cap pure planters with higher correlation to CPO price recovery and cheaper valuation, such as Asiatic and IJMP. For defensive dividend yield play we like BIRT, while Kulim is our preferred value play.
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