While CPO has surged, most large players have seen strong follow on interest in the share prices. However, the smaller players have not seen a corresponding jump. Of course there are valid reasons for that. Coverage is one, liquidity is another, lack of institutional presence is another, scale is another ... but profit is profit.
CPO futures rallied another 7% w-o-w while share prices at home were mixed. On Malaysia November exports, cargo surveyor Intertek reported an increase in shipments of palm oil over the month of November citing a m on m increase of 11.7%. MPOB statistics for November will be released on the 10th and it is likely that stock levels will drop. This in turn should keep CPO prices in a rally mode into 2011.
If you think gold is going to hold steady or rise further, then CPO should carry on its rally. Its a strong indirect play. Commodities will be up when USD or Euro is down.
In Indonesia, it was reported that their 2010 production may fall short of forecast. The forecast stood at 22.5m mt while production only looks able to achieve 21.8m mt as weather has been equally unfavourable for them. According to Bloomberg, Indonesia will increase the export tax rate for crude palm oil (CPO) from 10% to 15% in December. The last increase was for the month of November when the export tax rate was raised from 7.5% to 10%.
In the soybean market, it was reported that rainfall in Argentina has been below normal over November, hence affecting planting progress. The dry period has been exacerbated by the La Nina, which typically brings rain to the South East Asian region, and draughts to the South American region. This will continue to be a situation to watch as a further shortfall in soybean supplies is going to push prices higher.
Looking at the big boys (Sime, IOI, KLK, Genting Plantations, IJM Plantations), they are currently trading at 19x-22x for 2010 and 2011 earnings. Boustead is at 14x and 11x respectively.
But what I really fanci is not the big boys, its the small/mid players as the valuations have gone out of whack. For current year's earnings, MHC Plantations is at 7x, Kurnia Setia is at 8x, NPC also at 8x and TDM at 10x. The trouble with them is that it is very difficult to get liquidity. You get in, but you don't how you can get out later. Liquidity is paramount even in assessing value plays.
Kumpulan Fima is my standout pick. For year ended March 2009, its revenue and net profit were RM369m and RM46.16m respectively. For year ended March 2010, they were RM410.45m and RM58.75m respectively. Net EPS for 2009 and 2010 were 17.5 sen and 22.3 sen respectively.
For the 6 months ended September 2010, the company posted revenue of RM217.39m and a net profit of RM47.83m. Annualise that, you are getting RM95.66m, which is a stupendous 62% year on year jump. You can only get that kind of jump when you are not so big. No way will Sime or IOI be able to achieve that kind of jump even when the stars are all aligned. That gives them a 6 month EPS of 12.23 sen or annualised 24.46 sen. Chances are the second half of the year will post even stronger results for the company.
At RM1.43, the stock is at only 5.84x current year's earnings. Although it is not a pure CPO firm, CPO still makes up 60% of its net profit. All the same, their other divisions: bulking, food and manufacturing are all profitable as well.
Kumpulan Fima suffers from a perception problem. It was a highly speculative and poorly managed vehicle back in the 90s and even early 2000s, but there was a perceptible change in management and improvement in professionalism over the last 3-4 years, so much so that in 2009 the company was selected by the Forbes business magazine as one of Forbes Asia’s “200 Best under a Billion”. Best 200 in Asia and their PER is below 6x????????? Maybe nobody reads Forbes anymore????
Issued shares: 263.16m
BHR Enterprise Sdn Bhd 55.52%
Subur Rahmat Sdn Bhd 4.6%
I don't even want to think that Kumpulan Fima's valuations will get anywhere near the big boys. But seriously, it should at least match the other smaller players' PER. If you look at MHC, Kurnia Setia, TDM and NPC, they all suffer from low liquidity, something Kumpulan Fima does not suffer from. I like the gradual build up in volume over the past two weeks. I think there is going to be sufficient follow on interest from local funds and other investors into this stock to bring it closer to 8x current year's PER or RM1.92.
NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
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