Plantation Stocks - High Valuations Already Priced In EL Nino Impact

With the El Nino phenomenon looming in the next coming months from June 2014, plantation stocks remain well supported even though CPO prices have been trading lower (June 2014).

Traders expect CPO prices to rebound in view of the deteriorating weather conditions, which would translate into better earnings for plantation companies.

The current (June 2014) dry and hot weather is actually caused by Southeast monsoon and the much talked about Ei Nino has not arrived yet. Nevertheless, expects the weather to have an impact on CPO prices.

The past few months prior to June 2014 weakness in CPO prices was partly due to the rain, which removed concerns about Ei Nino. Now (June 2014) the weather has gotten hot and dry again – the same conditions that drove the market higher in the 1QFY12014.

There will be some immediate effect on production but main impact will only be see n in 12 months from June 2014. The extent of the impact will depend on the severity of the dry spell.

Malaysian’s palm oil inventory has been rising these past three months prior to June 2014.

Industry observers expect CPO prices to rise towards the end of 2014, underpinned by lower CPO production and better export performances which is normally seen in the second half of 2014.

In addition, expect the impending Ei Nino in 2HFy2014 will exert upward pressure on CPO prices in anticipation of lower production in 2015.

The will translate into better earnings for plantation companies. However most plantation companies are trading at a high valuations, a sign that the EL Nino impact has been factored in by the market (20 June 2014). Even if there is a rebound in CPO prices, plantation companies’ price have factored it in already unless CPO price moves beyond rm300 per tone.