By Carey Wong
Fri, 30 Jul 2010, 09:38:41 SGT

Crude palm oil prices have recovered quite nicely to hover around US$750/ton, after dipping to a low of US$682/ton in early Jul; this amidst weather uncertainties for the palm crop and potentially tight near-term supplies. But most note that it is too early to say whether the “La Niña” phenomenon – which is causing heavier-than-usual rainfall in Asia – will persist until the end of the year. Nevertheless, we believe that our US$750/ton CPO assumption for this year is still very much in the ballpark. Our top sector pick is Wilmar International Limited [WIL, BUY, FV: S$7.15], which operates an integrated business model (from plantations to consumer packs) with a well-established distribution network in China. And with CPO prices likely to remain firm, we believe that one of the key beneficiaries would be Golden Agri Resources [GAR, BUY, FV: S$0.72], which is one of the largest oil palm plantation owners in the world with some 430k hectares.

Potential curb in supply in 2H10. Crude palm oil prices have recovered quite nicely to hover around US$750/ton, after dipping to a low of US$682/ton in early Jul; this amidst weather uncertainties for the palm crop and potentially tight near-term supplies. A Dow Jones Newswire article noted that Jul production numbers – with just a single-digit gain - have been below expectations as erratic weather conditions lowered yields at key palm growing regions even as the trees go into high production season. And with demand still likely to outpace supply, industry watchers expect a draw-down in CPO inventory levels. But most note that it is too early to say whether the “La Niña” phenomenon – which is causing heavier-than-usual rainfall in Asia - will persist until the end of the year. Nevertheless, we believe that our US$750/ton CPO assumption is still very much in the ballpark.

Wilmar remains our top sector pick. Our top sector pick is Wilmar International Limited (WIL), which operates an integrated business model (from plantations to consumer packs) with a well-established distribution network in China. WIL also possesses a strong management team and is a market leader in the downstream edible oils and oilseeds industry. Given its extensive network, we believe WIL is well-positioned to ride on the still fast-growing economies in China, India and Indonesia (demand for CPO is likely to be exponentially boosted by urbanization and the corresponding demand for processed food). We also like its recent expansion into the lucrative sugar and oleo-chemical industries, which should further increase the value proposition of its China business. Hence we have a BUY rating on WIL with S$7.15 fair value. Potential overhang – unresolved tax issues in Indonesia.

We also like Golden Agri. With CPO prices likely to remain firm, we believe that one of the key beneficiaries would be Golden Agri Resources (GAR), which is one of the largest oil palm plantation owners in the world with some 430k hectares (ha). GAR is also looking to expand its acreage by 50k ha this year either through new planting or acquisition of existing plantations; to build up milling capacity in line with the fruit production growth; and to add more downstream processing capacity and logistics facilities in both Indonesia and China. We note it is already in the process of acquiring a food processing business in China. We have a BUY rating on GAR with S$0.72 fair value. Potential overhang – Greenpeace allegations of illegal clearing of peatland in Indonesia.