Monday, March 25, 2013

CPO- bottoming or bottomed?

In the Star newspaper today, the Chairman of IOI, Tan Sri Lee Shin Cheng was quoted as saying that the worst is over for plantation cycle (here). The reasons given by the IOI boss for calling the bottom for CPO are:
1. falling inventory levels (due to changes in export tax)
2. renewed B10 biodiesel programme
3. price differential between CPO and soyabean oil
Personally, I think the jury is still out on whether CPO prices had indeed made a bottom. To get a better feel of CPO, let's compare the current trough with the trough/bottom of 2008 (see Chart 1 & 2). From Chart 1, we can see that CPO bottomed & reversed in late 2008 after it had broken to the upside of a pennant formation. Today, CPO is still trapped in a bottoming formation known as a flag (or, some may call it a potential triple bottom). To break above the flag formation, CPO needs to surpass the RM2500-2550 level. Even after CPO has broken above that mark, it would immediately face resistance from the intermediate downtrend line at RM2700.

Chart 1: CPO's weekly chart as at October 2009 (Source: ifs.marketcenter)

Chart 2: CPO's weekly chart as at March 2013 (Source: ifs.marketcenter)
We must note that the breakdown of the long-term uptrend line in May 2012 is a very significant technical event. It is comparable to the breakdown of the long-term uptrend line in 2008 when the market took quite a while to stage a decent recovery. As such, Tan Sri Lee's target of RM2900 for CPO by year end looks rather bullish.

Chart 3: CPO's weekly chart October 2008-March 2013 Source: ifs.marketcenter)

Incidentally, after screening a few of the major plantation stocks- most of which are in various stage of consolidation- the only stock that caught my attention was Utdplt. The stock is trying to break above its all-time high at RM27.50. There are steady buying by its major shareholders, Aberdeen & Mitbubishi UFJ Financial Group. Is Utdplt at the cusp of another breakout? The last two breakouts - July 2010 & February 2012- preceded bullish technical breakout in the CPO in October 2010 & March 2012. Is Utdplt flagging another bullish breakout for CPO? Utdplt is well-acknowledged as one of the best managed plantation group in Malaysia, commanding a PE of 17 times.

Chart 4: Utdplt's weekly chart as at Mar 22, 2013 (Source: Qyuickcharts)

In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Utdplt.


hkloon said...

Dear Alex,

Although GE13 is to be called very soon, some of the sector index seems to do a pretty good rally, especially theme related to property and iskandar malaysia. Is it safe to put some portion of our stock portfolio in property counters in this period leading to GE13, some of which is really undervalued if land revaluation is taking place. your advise is much appreciated.

Alex Lu said...

Hi hkloon,

Despite the impending general election- a big uncertainty that all investors abhor- the market is still behaving rather rational. Traders & investors are still talking about stock fundamentals & technical outlook. To me, this is a very healthy sign. To be sure, I believe the market will drop 20-50 points once the Parliament is dissolved. It would be followed by a period of volatile trading. An upset by Pakatan - an improbable event- will likely a sell-off of 50-100 points. Otherwise, I believe the market will roar back if the election is successfully concluded and the BN return victorious.

In that scenario, I am inclined to believe that you can nibble in this market. You can buy into the weakness once the election is announced.

On good attractive property stocks, I feel that many of them are still attractive. My fear is that we may see a sharp run-up in property market and the government may slam tight restriction, similar to what we saw in Singapore, and then the whole property play may end abruptly.

Good luck.