Asia Plantations Sector - Volatility and uncertainty - UBS Investment Research

􀂄 Lower CPO price assumptions
Due to a sell-off by investment funds on global uncertainty and the strengthening ringgit, the CPO price has been weaker than expected in 2011 despite supportive demand-supply fundamentals. Therefore we lower our CPO price assumptions by 11% from RM4,000/t to RM3,548/t in 2011-13 and by 10% from RM3,504/t to RM3,166/t in 2014.

􀂄 Investment funds’ sell-off overshadows fundamentals
As a result, we lower our 2011 EPS forecasts by 8-22%, our 2012 forecasts by 7-18%, and our 2013 forecasts by 6-23%. In Q211, we think demand-supply factors may again be the main driver for the sector, especially after the sell-down by commodity investment funds in the past two months triggered by the unrest in the Middle East and events in Japan.

􀂄 What can turn the tide? Two catalysts to focus on in Q211
1) The 31 March Planting Intentions Report from the US Department of Agriculture (USDA) will set the tone for soybean supply in H211, in our view. We believe it will confirm that soybean supply will remain tight. 2) Monthly palm oil stock levels from the Malaysian Palm Oil Board should confirm whether the cyclical recovery in production can be offset by demand.

􀂄 Changes in stock preferences
Golden Agri-Resources is our top pick in the sector for its production growth and pure upstream exposure. We prefer London Sumatra (Lonsum) to Indofood Agri, given the uncertainty regarding the listing of PT SIMP. We prefer KL Kepong to Sime Darby and IOI Corp, given the latter two companies’ greater diversification.