CPO

CPO: DBSV has sector report. Recommend investors vested in the sector to take Cover in Malaysia plantation stocks. If the 2008 global financial crisis were to be repeated, planters would still have 20-80% downside from current levels – based on trough PE and PBV valuations then.

A trade freeze can distort otherwise resilient palm oil demand; as piling inventories in producing countries send a bearish signal. But bear in mind that buyers’ current inventories are already low and restocking demand would not take long to reappear.

Some planters are riskier than others and house stress-test planters under coverage for an unlikely event where CY12F palm oil prices drop to a flat average of Rm1,400/MT (previous trough). In this scenario, Sampoerna Agro, IndoAgri, Kencana Agri and TSH Resources would have to scale down their capex and/or add leverage to cover short term cash deficit.

Recommend investors reduce exposure in Indonesia, as Indonesian upstream planters have historically been the most exposed to foreign investors’ flight to safety during economic downcycles; while Malaysian planters have tended to be least affected. Focus on diversified/high-yield CPO stocks. Stocks with yoy earnings growth and/or decent div yields should outperform peers. House continue to recommend Sime Darby and First Resources. Cut Wilmar, IndoAgri and KLK to Hold on limited upside.