On the supply outlook is in line with our expectation, especially the palm oil supply from Malaysia. Also we have highlighted that the weaker than expected 1Q production reported by most of the Indonesian plantation companies is an indication of potential downwards revision on Indonesia total production.
We are still bullish on the sector, but we think that the rally on CPO price unlikely to sustain as the current high price might deter buying and also we also concern on the rising foreign participations in Bursa commodity exchange. The last we see the surge in foreign participation was in 2H07 till Mid-08, which we saw the highest volatility to CPO price.
For 2H09, we are expecting CPO to trade lower with an average of RM2, 200/tonne (vs our previous expectation of RM1,800/tonne and 1Q09 average: RM1,918/tonne).
Our top pick: Wilmar (WIL SP) as sector leader and its information and network advantage enable Wilmar's to deliver a better than industry profit margins.
For mid-cap prefer Singapore and Indonesia listed companies as valuation are less demanding. Our picks: Indofood Agri (IFAR SP) and Sampoerna Agro (SGRO IJ).
For exposure to Malaysia, our picks are KL Kepong (KLK MK) and Asiatic (ASP MK).
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