GROWING worries over the health of the US and global economies have sent stock markets worldwide tumbling in recent days. Commodities prices, which have been riding high, were also hurt on concerns that a slowing US economy would dent demand.

Crude oil futures, which briefly, broke through the psychological US$100 (RM330) per barrel mark earlier this year, has eased slightly to around US$90 per barrel. The benchmark crude palm oil (CPO) futures contract is also down by about 5% from its recent all-time high of RM3,420 per tonne.

CPO outlook still firm, on balance
The price correlation between crude oil prices and CPO has been very strong in recent months. Targets to blend biofuel into transport fuel remain in place. While the use of palm oil as biodiesel is currently not viable because of its high cost, subsidies in countries like the US and EU are diverting the use of major oilseeds like rapeseed and soybean for biodiesel production.

The EU’s proposal to ban imports of biofuel derived from crops planted on certain kinds of land, including rainforest, wetland or grassland — on environmental issues — may have dented sentiment for CPO.

Bear in mind though, CPO remains a substitute as food for other oilseeds and vegetable oils, should more of the latter be diverted to production of biofuel. For instance, palm oil stands as a good substitute for soyoil. The fact that CPO prices are currently trading at over US$180 discount to soyoil should offer some floor support.

Rising global demand for edible oil
Despite prevailing uncertainties, global demand is still strong, driven by rising consumption in China and India, while stock levels are low for most oilseeds and edible oils.

Traditional food crops like corn and sugarcane are increasingly being used as feedstock to produce ethanol, another popular

form of biofuel. Their higher prices, as well as that for wheat, are intensifying the competition for acreage with soybean.

More and more extreme weather conditions too are affecting crop planting and harvests around the world. On balance, the markets for food commodities should hold up better than stock markets — people still have to eat in a downturn.

Expect double-digit earnings growth in 2008
Although CPO has come off its high, prices are still robust from a historical perspective. Asiatic Development (RM7.80) sells most of its CPO output in the spot market and so should see immediate benefit from prevailing high prices. Earnings will also be boosted by our estimated 6% growth in FFB production in 2008.

The company’s oil palm plantation landbank — currently totalling some 65,530 ha — is relatively young. Mature trees account for almost nine-tenths of total planted area, about 47% of which are in their prime ages of 7-15 years. Some 20% are between the ages of three and seven while another 9% of currently immature trees will enter production age over the next year or two.

Its current yield per mature ha is estimated at about 22.1 tonnes, higher than industry average of about 20 tonnes. Asiatic expects yield to improve as more trees mature into their prime production ages over the next few years.

We estimate Asiatic’s net earnings should hit RM329 million for 2007, or almost 92% higher than the RM171.1 million recorded in 2006. Looking ahead, net profit is expected to expand by another 13% y-y in 2008 to RM370.9 million or 49.2 sen per share. We are assuming a fairly conservative average CPO price of RM2,600 per tonne in 2008. Should the current high prices persist, earnings will be even stronger.

Expansion plans to underpin long-term growth
Asiatic has embarked on an ambitious plan that will significantly expand its plantation business and transform the company into a major league player. The company is in the midst of acquiring some 98,300ha of land in Indonesia. If all goes to plan, its total plantation landbank will rise to nearly 164,000ha. That would place it at par with its bigger peers. The venture is expected to start contributing by 2010-2011 — and will underpin growth over the next decade.

The land is divided into five contiguous parcels. The first parcel totalling about 14,261ha has been successfully acquired and cultivation works have begun. The company intends to complete planting in 4,400ha by 1Q08 while the remaining area will be fully planted by 2009.

It will also invest in five palm oil mills with the capacity of about 120 tonnes per hour each. The first mill is targeted for completion some time in 2010-2011 when the first crop of FFB is harvested.

Relatively attractive valuations
At the current price, the stock is trading at P/E ratios of just under 16 times our estimated earnings in 2008 — below valuations on peers IOI Corp and KL Kepong. Thus, Asiatic offers investors a cheaper exposure to the plantation sector — with arguably the best prospects for longer-term growth.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.

This entry was posted on Thursday, January 31st, 2008 at 11:15 am and is filed under Palm Oil World News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.