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2009-10-03

Long-term CPO price raised by 8.5-11.5%

















Long-term CPO price raised by 8.5-11.5%.
HWangDBS adjusted our CPO price assumptions in anticipation of tighter edible oils inventory, and to impute changes to our macroeconomic assumptions, including weaker USD and higher crude oil prices. At the micro level, base on HwangDBS reported that also imputed changes to new planting targets. Valuations were consequently upgraded, some with significant upside potential.

Positive outlook.
The recent correction to plantation stock prices means value is emerging. HwangDBS expect palm oil prices to recover in 4QCY09 (averaging RM2,400-2,500), following recent selling. Slower-than-expected 3Q supply growth in Malaysia prompted us to cut CY09F palm oil supply by 3% to 17.6m MT. This made our price outlook more positive for next year (assuming no downside to Indonesian palm oil production forecasts).



















Why now is a good buying opportunity.
Lower expected edible oil inventories and rising crude oil prices next year are precursors to higher CPO prices. Low borrowing costs also prompted planters to raise funds. This may spur new planting next year; hence accelerate value creation. Stronger regional currencies would also cut borrowing costs and FX losses for companies with USD borrowings; while lower
freight costs should enhance profitability. Over the next decade, China, India and Africa/Middle East will continue to demand more palm oil. As we expect CPO prices to appreciate by 1% CAGR over the next 10 years (or 1.7% in USD terms), each planter’s ability to step up its volume –
relative to peers – is an important consideration. A regional peer comparison is shown below:-

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