The Edge mid-week Comment Apr 22: Indonesia spurs SGX plantation stocks

Thursday, 23 April 2009 10:05
SINCE THE BIG victory of incumbent President Susilo Bambang Yudhoyono’s party in the recent parliamentary elections, foreign investors, forex and stock markets – and regional media like CNBC -- have focused attention on the country. In fact, the top performing market in the region is Jakarta. The JCI – Jakarta Composite Index – at 1,615 is up 19% since the start of the year, compared to a small decline by Bangkok’s SET Index (460), a 10% gain in the Bursa Malaysia Composite Index to 968 and a modest 4% up-tic in Singapore’s benchmark FSSTI. As some analysts see it, Indonesian democracy has come of age, and there is a semblance of political and economic stability in the vast, resource-rich archipelago.

In the past few days, analysts have woken up to rising palm oil prices, as a result of low palm oil inventory and poor harvests and investors have been inundated with a host of reports upgrading the plantation sector. “CPO price is likely to move higher before pull back (if any) in 2H09” notes Jakarta-based William Ie, an analyst at CLSA. “Palm oil supply remains tight as harvest remains poor and bad weather hampers fresh fruit bunch evacuation.” In addition, Malaysian palm oil inventory fell to 1.36 million tonnes in Mar this year, the lowest since Jul 07. What’s more, soybean supply is just as tight after a poor harvest in Argentina.

In a report dated Apr 21, Goldman Sachs upgraded Wilmar International to a buy: “In our view, Wilmar should be a core holding for long-term investors as it offers high quality, high-growth exposure to the palm oil sector given market leadership in its downstream businesses and strong organic growth potential.” Goldman Sachs has also turned positive on Indofood Agri and is adding the stock to its ‘conviction buy list’. According to the report, refinancing risk has diminished on the back of rising CPO prices and a liquid rupiah debt market. Analysts Patrick Tiah and Nikhil Bhandari estimate that every 10% increase in CPO prices boosts 2009E EPS by 21%. The duo have a 12-month price target of $4.10 for Wilmar, and $1.40 for Indofood Agri. On Wed, DBS Group Research raised its target prices for several plantation stocks. It has a buy on Kencana Agri, raising the target price from 14 cents to 20 cents. DBS expects Kencana’s mature areas to jump by 37%. “Taking into account the 20.5% q-o-q jump in spot prices, delivery of last quarter’s delayed CPO sales and the absence of a one-off IPO char, we expect higher earnings q-o-q” the report states.

CHART WATCH: MARKETS A TUMBLEThe local market took its lead from China’s A Shares this week. The Shanghai Composite Index ended Wednesday’s session at 2,461, down 2% from its intraday high and its forming a short term bearish engulfing pattern on the candlestick chart. Hong Kong was the main market that bore the brunt of the Chinese sell down. The Hang Seng Index has tumbled some 791 points from its high last week to 14,878 on Wed. Overbought pressures aside, market watchers attributed the downturn to the People’s Bank of China (PBOC) withdrawing Rmb165 billion of liquidity from the open market, including Rmb100 billion though the three-months’ REPO market. Also, market talk surfaced that the incremental loans figures from China’s big four banks could be a negative Rmb 90 billion for the month of April. Support for the Shanghai market is at 2,400, and its 200-day moving average is bottoming out at 2,304. Technically, the FSSTI was ripe for a correction, following almost six-weeks of non-stop advance. The index ended 43 points lower on Wed at 1,843. The minor uptrend that has developed since Mar 9 is intact, and the 50-day moving average currently at 1,680 has turned up. Immediate support is at 1,800, and a one-third retracement works out at 1,771. All in, markets had run up too much, and the PBOC provided the trigger for a much needed correction.