KLSE Trading Notes
Palm Oil & Market Themes

Following on my comments that the Federal Reserve seems to have finished with its rate hikes, markets have yet to move ahead. While I am positive on the fundamentals, the timing effect is not there yet. July/August tend to be dull months as many investment pros will be on hols. As explained before, most will gather like a pack of wolves for a push in the final quarter. The setting looks good, we just need oil prices to behave till then, it needs to stay below US$80 pb for the last quarter bull to emerge.

As for KLSE trading activity, the palm oil rally has already been a bit overdone. Its a rally based on palm oil futures, and not a rally based on the biodiesel theme. Investors should be aware that bio diesel is not magic, and is not an avenue that allows for huge margins. Its just one additional sub-sector in the palm oil supply chain. You'd be just as profitable to be in oleochemicals, or producing specialty fats for cosmetics out of palm oil, etc. Of course, Malaysia and Indonesia have agreed to set aside a huge amount for biodiesel. It will create a substantive increase in real demand. The 12 mn MT CPO allocation will be a tad too much for biodiesel to stomach. 12mn MT equals to about 40% of each country's annual production. In all likelihood, only 5 mn MT will be taken up in 2007, this effectively translates to 16.6% of each country's annual CPO production. Now the figure does not look so threathening.

Having said that, organic growth from edible side will provide about 5% annual growth in demand. Add that, you get around 21% real consumption demand growth a year. IOI Corp has already gained more than 45% over the last 12 months. Golden Hope recorded a sluggish 30% over the same period, while KL Kepong notched nearly 60% gain over the last 12 months. Best performer was PPB Oil Palms with a better than 75% gain over the last 12 months. Compare that to the KLCI over the same period, you will have wonderful outperformance. Not that I am saying the sector's rally is finished but rather that the upside is limited. But also the sector won't collapse at all as the fundamentals governing the sector are pretty solid. Strong buys on any kind of dips due to external market shocks.

The shift to smaller and second tier palm oil plays look more exciting as these are solid companies also but just smaller and they have not been re-rated as highly as the big caps, now they are playing a bit of catch up. Probably another 15%-20% upside in store for them, I am referring to trading counters such as Kretam and TH Group. Forget the rest, too small.

As for the other theme play in cables and new Bakun revamped proposal - forget about it already. Its cumbersome and should not be allowed to proceed. Hate Leader, Eden, etc... trade at your own peril.