Tuesday, July 07, 2009

Where is the correction in Plantation stocks?

In April & May, we have noted that CPO was showing signs of weakness near its recent peak at RM2800 (here & here). Since then, CPO has corrected to the RM2100-2200 support level. The support is provided by the short-term uptrend line (currently at RM2150) and the overcome medium-term downtrend line (currently at RM2080). If these two supports failed, CPO can test the horizontal line support of RM2000.


Chart 1: CPO's weekly chart as at July 6, 2009 (source: ifs.marketcenter.com)

Despite CPO dropping about 25% from its peak, the Plantation index has experienced only a mild correction (see Chart 2 below). Part of the reason could be that plantation companies may not suffer too badly as the decline in CPO prices would be offset by increase in their output. I have tabulated the FFB output for IOI for the past 12 months & we can see that its monthly FFB output are sharply higher for the period from July to November (see Chart 3 below). Looking at the Plantation index, we can see some weaknesses in the MACD, Williams %R & ADX indicators. If the Plantation index were to weaken further, it may test its medium-term uptrend line support at 5000 mark.


Chart 2: Plantation's daily chart as at July 6, 2009 (Source: Quickchart)


Chart 3: IOI's 12-month FFB Output Jun-08 to May-09 (in thousand metric tons)

In the recent past (say, in 2007), CPO moved in tandem with Crude Oil. Some may think that the close correlation may have weakened. The correlation may be stronger if Crude oil is above USD60-70, the threshold for profitable bio-diesel operation. In any event, Crude oil has also entered its corrective phase- one month later than CPO. We can see below that WTIC may soon test its medium-term uptrend line support at USD62. I have earlier posted about the possibility of a correction in Crude oil (here). I still believe the current uptrend would remain intact.


Chart 4: WTIC's daily chart as at 6/7/2009 (Source: Stockcharts.com)

Based on the above, I expect plantation stocks to remain resilient. Correction, if any, is likely to be mild (say, 10%). If CPO remained above RM2000 & Plantation index remained above 5000, we may slowly accumulate some plantation stocks that have corrected.
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2 comments:

  1. UnknownWednesday, July 08, 2009 9:05:00 AM

    Alex,

    What would be the reason(s) for huge selling in BToto over the last 2 days considering there is an impending big payout in dividend that goes ex. next week?

    Thanks.

    ReplyDelete
  2. Alex LuWednesday, July 08, 2009 1:32:00 PM

    Hi Brian,

    I am not sure what's happening here? My guess is that a price of RM5.30 would have more than adequately factored in the value of the dividends being paid out this month. The dividends include cash dividends of 30 sen & a dividend-in-specie of 1 share for every 14 shares owned. I valued the latter as followed: 1/14 x (yesterday price of RM4.98 less cash dividends of RM0.30) = 33 sen. As such, the dividend is worth about 63 sen in total.

    From the chart, we can see that BToto is trapped in a rising wedge since November last year. The lower & upper boundary of this wedge is currently at RM4.66 & RM4.92. If you are conservative, you add the 63 sen dividend to the RM4.66 lower boundary of the rising wedge, you will arrive at a value of RM5.29.

    With the share sliding lower now, you may consider buying the stock if the price is below RM4.92 or lower.

    ReplyDelete