Plantation Stocks: Limited Upside

There is a divergence between the steady rise in CPO prices and the stagnant share prices of many plantation stocks. Look at the CPO and Plantation Index charts below.


Chart 1: CPO's weekly chart as at Jan 10, 2017 (Source: ifs.marketcenter.com)


Chart 2: Plantation index's monthly chart as at Jan 26, 2017 (Source: Shareinvestor.com)   

Share prices of plantation stocks remain stagnant because earnings of many plantation companies have remained stagnant. That's the surprising conclusion I got when I tallied up the earnings of 4 plantation companies which are mainly concentrated in the plantation business. Notice that earnings peaked in 2011 while their revenues continue to rise.


Table: Selected Plantation Companies' Revenue & Earnings for past 12 years

Now, we know that CPO prices in MYR have risen in the past 6-7 months because of two factors: lower CPO output (due to lower FFB output because of the El Nino effect) as well as the weakening of MYR. What would happen to CPO prices in MYR if MYR strengthens (or USD-MYR weakens) or when FFB output increases as the El Nino effect subsides. Chart 3 below shows that USD-MYR has probably made a temporary top.


Chart 3: USD-MYR's weekly chart as at Jan 26, 2017 (Source: Investing.com)

CPO prices in USD has limited upside as it struggles to overcome the "horizontal line" at USD600.


Chart 4: CPO (USD)'s weekly chart as at Jan 26, 2017 (Source: Investing.com)

If CPO prices in USD and USD-MYR begin to correct, we will see a bearish reversal in CPO prices in MYR. This will lead to a drop in the overall earnings of plantation companies and eventually a decline in their share prices. Thus we have to be careful not to be overly-exposed to the plantation sector.