NOT ALL THE news leading to the upswing in plantation stocks is good. In fact, in a report published today by CLSA titled Greed and Fear, analyst Christopher Wood blames the current inflationary trend in commodity prices on talk of quantitative easing in the West and the currency wars.

“It is quite possible that current conditions lead to a repeat of the commodity price-driven phony inflation scare world markets last experienced in 2007 and early 2008,” Wood writes.

 

“Remember how the fashionable concern then was about how Asia was about to be blown up by an epidemic of food inflation. These concerns peaked, ironically, just as the US housing market and related securitisation markets began to implode,” he reminds us. “Any repeat of such a scare will likely lead to the same conclusion as before. That is to an overshoot in commodity prices driven by financial investors in commodity indices and related ‘ETPs’, and a resulting violent sell-off. That sell-off will again likely be characterised by a violent rally in the US dollar as the carry trades are liquidated,” he warns.

 

Instead of wringing one’s hands, Kim Eng Research says one way to play the West’s quantitative easing game is to bet on the laggard in the plantation sector, the local broker suggests in a note dated October 15.

 

In general, commodity prices have been rising, which Kim Eng attributes to ‘improving global economic performance’ that has fuelled demand for hard and soft commodities. More specifically, CPO (crude palm oil) prices rose sharply over a supply shortfall, primarily in Malaysia, due to a weak harvest, Kim Eng adds. The broker also notes Wilmar International got a boost today after it became apparent billionaire and substantial shareholder Peter Lim’s bid for Liverpool FC was going to fail.

 

So, who’s the slowcoach in the climb? “An analysis of the three-month share price performance indicates that First Resources is the biggest laggard in this rally,” says Kim Eng. First Resources is one of the purest plantation plays in the sub-sector and it stands to reason that it would be among the biggest direct beneficiaries of higher CPO prices,” the report explains. In terms of PERs, First Resources at 13.5 times current PER and 11.7 times forward PERs has the lowest ratios. Golden Agri Resources has the lowest price to book valuation at 1.1 times and Kencana Agri the highest EPS growth of 60%. However, it also has the highest current PER at 40 times.

 

Singapore Exchange is scheduled to announce its 1Q11 results on Monday, October 18 before market opens. Daiwa Securities is forecasting a revenue increase of just 2.8% year-on-year, to $178.2 million, and a decline in net profit of 8.2% y-o-y to $86.4 million due to higher technology expense and depreciation. But further on, Daiwa is bullish. “We believe the pipeline of pending initial public offerings (IPOs) will boost trading activity. The total amount raised for 2010 is projected to exceed $8 billion,” it states in a report out today. Hence, it is raising its six-month target price to $10.60 from $8.94. This valuation takes into account a forecast average daily turnover of $2.3 billion for FY11 which includes the impact from the trading of ADRs (American Depository Receipts) in Singapore. Daiwa has an outperform rating for SGX. The counter last traded at $10.12, up 21.5% year-to-date.

 

At the moment, the STI (3,204) is facing upward pressures. However, short-term indicators are beginning to fatigue and the 3,200 level may pose a psychological resistance. Any retreat would be temporary and find support at 3,120. An earlier break above 2,900 gave a measuring objective of 3,400 and this still stands.