HWANGDBS Vickers Research believes it’s time to pick the winners in the PLANTATION sector with the price outlook for crude palm oil (CPO) looking positive in the fourth quarter (4Q).

“Buy Wilmar International and Kencana Agri now. Others, wait for more bargains,” said the research house in a report yesterday.

HwangDBS Vickers Research is positive on the price direction in 4QCY09 as it expects a demand boost to follow slower exports over the next month or two.

“Our CY09F and CY10F CPO prices are both maintained at RM2,300,” it noted.

The expectation is mainly based on the insufficient monsoon rains in India and drought in northeast China this year that may create tight soybean supplies post harvests.

The research house said at current prices, Wilmar International Ltd and Kencana Agri Ltd, both listed in Singapore, offered decent upside potentials, as recent weakness was not justified.

“We expect stronger 3QCY09 processing margins for Wilmar and higher-than-peers 3QCY09 volume growth for Kencana Agri,” it added.

HwangDBS Vickers Research also liked KUALA LUMPUR KEPONG BHD, First Resources Ltd (Singapore-listed) and Indofoofd Agri Resources Ltd (Singapore and US-listed) on further weakness.

Second-quarter earnings for plantation stocks under the broker’s coverage have performed mostly in line with its expectations.

“Planters’ 2Q09 earnings jumped quarter-on-quarter, as expected. Except for Astra Agro (Astra Agro Lestari Tbk PT — US, Germany, Luxembourg and Indonesia-listed), these were due to one-off gains and stronger performance in other segments,” it said.

It also noted that Indonesian planters’ volume growth outperformed Malaysia’s, which were dragged by lower yields in Sabah.

During the quarter, planters benefited from a gearing declined on higher cash and a weaker US dollar; cash conversion cycle mostly extended on higher inventory.

Another plus was that production cost except for Genting Plantations Bhd, declined year-on-year, as fertiliser prices eased.

The research house rated Genting Plantations fully valued. The company had performed lower-than-expected in its 2Q09 financial results mainly due to lower-than-average market prices locked in last year of fertiliser, it said.

On top of this, CPO buyers may also be holding out.

“Our recent inquiries with palm oil traders suggested that Indian and Chinese purchases for October festivities are mostly completed.

“In our view, Indian and Chinese buyers are holding out for more attractive prices as soybean harvests are around the corner. Flat August and September palm oil exports may therefore raise Malaysian palm oil ending stocks; and palm oil price may have negative bias in the near term,” said HwangDBS Vickers Research.

Another broker, ECM Libra Research has pretty much the same view on the sector but notably likes Genting Plantations.

ECM Libra said it saw countless announcements of major funds taking profit on plantation counters, during the week as stocks and CPO prices fell.

“We believe that this might continue to be seen during the peak production period and we advise investors to buy back at lower levels.

“Looking at our stock list, Kuala Lumpur Kepong (hold) particularly is looking more attractive at current price levels compared to SIME DARBY BHD (hold) and IOI Corp Bhd (hold). Also, we continue to like Genting Plantations (buy) and BOUSTEAD HOLDINGS BHD (buy).”

According to ECM Libra, Malaysian Palm Oil Board (MPOB) statistics to be announced this week should see softer exports as “but there is still speculation on how strong/softly production numbers will come out”.

The broker also noted that there has been much talk of August production also being weak due to dry weather in certain parts of Sabah and Sarawak