Sunday, February 20, 2011

Sarawak Oil Palm(SOP), more upsides ahead?

OSK research on the overall is not quite bullish on plantation sector. They maintain a neutral call even in their recent sector update, despite of the sector has a very good run in the last 6 months. They believe that we are in the phase of PE compression period -- firm CPO price but the market does not want to take the bite. Also, there are factors that could throw a spanner in the works creating headwinds for this sector namely

(1) The La Nina may return normal level by mid 2011
(2) Favorable weather condition may boost soya bean production

But there is one stock that they are quite bullish makes me to take notice again. They found that SOP is relatively cheap.

So I started off checking its performance. The good news is this stock outperformed KLCI, Plantation Index also outperformed IOI.

Hmmm....that makes thing interesting because that implies the market is not stupid and did not condemned the whole sector indiscriminatingly. The market will recognize good value stocks.

Then I checked further on the shareholders list. Well it did not disappoint me so far because the list is not dominated by small shareholders. Institution funds do own the stocks.

So far, so good. Then I continue to listen to their arguments which think are good arguments.

Since they are not that bullish about the sector, I find their assumptions are reasonable and also conservative enough put a tag of RM 5.22 target price to be realized within 12 months.

1. Their assumption of CPO of RM 3,200/MT is conservative enough.
2. Their aggressive replanting in the last few years and also having high young trees will boost its production for the next few years.

3. Reversion to mean as SOP is unjustifiably cheap compared to peers.

They argued that

In terms of SOP’s planted area is 68% higher than that of IJMP’s and yet has a market cap that is 33% lower than the latter. Compared to GENP, SOP’s planted area is 71% of GENP’s while its market cap is 26% of GENP’s. All three are net cash companies.

In short, either this stock is truly undervalued and undiscovered yet or it will remain as value trap.

Looking at the stock price movement and out-performance, I do not think this stock will remain cheap especially there are a few stocks like (R Sawit, Tradewinds, Hap Seng, TH Plantation etc) already have a good run. I think this correction period is an excellent time to pick up some of SOP shares.

Disclosure : The author has been trading in and out of this stock and currently is having a long position.


WK said...

what do u think about TDM? planted areas more or less similar to SOP but result wise not very impressive...

still cheap tho...

Turtleinvestor said...

Cheap Yes. But most them are mature, profit will depend a lot on CPO price.

Planted area is only 55% of SOP.

Their plant to acquire 25,000 hectres will take some time to realize.

Not a pure plantation play as they have diversify into healthcare.

Bottom line, RM 2.50 - RM 2.60 will be a good entry point.