Project CY07 average CPO price at RM1,950/mt, without El Nino

Government warns of possible drought
The press reported that Malaysia Meteorological Services Department expects
Malaysia to possibly experience a prolonged hot and dry weather in the
months ahead. Accordingly, the country is on high alert for peat and bush fires
with three areas in Pahang and Selangor identified as potential red spots.
Besides, Syarikat Bekalan Air Selangor (Syabas), the Drainage and Irrigation
Department, and the Department of Environment have also warned the public
to start conserving water.
Despite lower production, drought will be positive for plantations
We believe that drought, if it is not too severe and prolonged, will be positive to
plantations. Crops production will be lower than usual, but this will be morethan-
compensated by higher selling prices. To illustrate, CPO price averaged
at RM2,372/mt (+70% yoy) in 1998 when the severe El Nino had resulted in a
17% yoy decline in CPO yield (1998 average CPO yield was 3.02mt/Ha
against 3.63mt/Ha in 1997). Pure CPO producers - like Asiatic, would have a
more meaningful impact as compared to integrated producers - like IOI Corp.
Reason being higher CPO price will erode oleochemical producers' margin as
not the entire hike in production cost will be pass to end users.
Project CY07 average CPO price at RM1,950/mt, without El Nino
We forecast a 28% hike in average CPO price in 2007 to RM1,950/mt, and
step up by 8% to RM2,100 in 2008. This does not take into account of a
drought, and is purely underpinned by the structural shift in demand dynamics
caused by the biofuel take up.
Maintain OVERWEIGHT; Top pick Asiatic- TP RM5.50
With the favourable CPO price uptrend – even without factoring in drought,
plantation companies' valuations are appealing. We maintain our
OVERWEIGHT call on the plantation sector, with a BUY rating on Asiatic (TP
- RM5.50). We have ADD recommendations on IOI Corp (TP - RM19.60) and
KLK (TP - RM16.30), while PPB Oil is REDUCE (TP - RM12.10). Asiatic is
our top pick since it is one of the few listed mid-sized pure upstream plantation
companies.