Warrants Highlight

Where next for CPO prices?

Yesterday, palm oil giant Wilmar International led the market up with its 1.5% upward move to $3.29. This takes its total gains in two days to +9.7%. Wilmar had previously finished on a three-year low of $3 last Thursday.

A day after Wilmar’s recent low, Macquarie Equities Research (MER) issued a report on the crude palm oil (CPO) industry, on 14 Sept, stating that CPO prices may be close to bottoming out but may disappoint near term. CPO stocks have traditionally had a positive correlation with CPO prices.

Macquarie’s Wilmar warrants

The following are excerpts from the MER report.

The breakdown in the correlation between CPO and soybeans in the past 12 months has surprised many. MER attributes this to a fall in the value share of soy oil in the beans complex, as the edible oils market is not fundamentally tight.

MER expects CPO price outlook to improve beyond Oct 2012
MER believes crude palm oil prices are close to bottoming out and will regain upward trajectory once we are past the peak production in Sep/Oct. MER’s thesis is premised on the following:

* CPO is priced attractively relative to soy oil, trading at a US$300/t price discount vs. the historical average of US$150/t, which should shift demand;

* Macquarie’s global commodities team expects soy prices to rise further into 1Q13;

* CPO – diesel spread is currently negative, which could spur demand for fuel;

* Palm oil will need to increase its market share substantially in 2013 given supply deficits in all the other oils.

Despite this MER forecasts prices to average lower in 2013

* MER expects 2013 to be an up cycle year for biological yields in Malaysia and Indonesia. Add to that, Indonesian plantings were fairly strong during 2007-09, which should provide strong production growth in 2013;

* Demand growth has decelerated significantly for the biodiesel market;

* Competition between Malaysia and Indonesia for international market share is heating up, with Malaysia recently increasing tax-free quotas for CPO exports. This could get even more intense in a year of good production.

Near-term earnings could disappoint again

Physical CPO price is currently below RM2,800/t and lagging the futures price by over RM100/t, which is not often the case. This could mean price realisation for CPO companies could disappoint once again. Also, Malaysian companies should continue to see volatility in downstream margins due to the Indonesian export tax structure. Finally, palm kernel prices remain under pressure due to recovering coconut oil supply. MER also views the market’s expectations of average CPO price realisation of RM3,400/t for 2013 as too optimistic.

Singapore Market Wrap

Back to reality

After Friday's strong rally, Asian indices movements were muted on Monday as investors turned their focus on the Eurozone crisis. The STI rose 0.3% day-on-day to 3,078.72, while the FTSE China A50 Index fell 2.2% dod to 7,138.73.

Investors bought into both HSI and STI puts yesterday. In particular, the STI puts Q0ZW and Q4PW were actively traded.

STI 3100MBeCW121031 (Q1AW) exercise level 3,100.*
STI 2950MBePW121031 (Q0ZW) exercise level 2,950.*

STI 3250MBeCW121231 (Q4OW) exercise level 3,250.*
STI 3100MBePW121231 (Q4PW) exercise level 3,100.*

CN8500MBeCW121129 (QP3W) exercise level 8,500.*
CN7500MBePW121129 (QP5W) exercise level 7,500.*

Ezra rally continues
Ezra continued its September rally with another 3.9% gain yesterday to close at $1.205. 31.2mn shares changed hands, almost 2.4 times of last week's average daily turnover. The company has risen 12.1% since the start of September, only recording one day in the red.

Call warrant Ezra MBeCW121101 (QD8W) exercise price $1.10.*
Call warrant Ezra MBeCW130603 (Q8EW) exercise price $1.20.*

SembMarine acquires Smulders Group
Sembcorp Marine (+0.4% dod, $4.10) announced yesterday that its subsidiary had purchased the entire stake of Smulders Group. Smulders is an UK based company primarily focused on the Oil and Gas markets. The management said that the acquisition enables Sembcorp Marine to have a foothold in the UK, providing synergistic support and reaching out to its North Sea clientele.

Call warrant SembMar MBeCW121203 (Q0OW) exercise price $5.00.*
Call warrant SembMar MBeCW130104 (Q4NW) exercise price $5.50.*
Put warrant SembMar MBePW130103 (Q4GW) exercise price $4.70.*

Overnight Market Wrap

S&P breaks rally

Last night, the S&P broke its 5-day rally, closing at 1461.19, down 0.3% day on day. The decline could be attributed to both the contraction of manufacturing in New York as well as the lack of developments from the Eurozone.

European Union ministers were not agreeable on a timetable for a more unified banking system, the bailout conditions as well as the role of the European Central Bank during their meeting in Greece, which is scheduled on 14th Sept.

In the US, September manufacturing figures in New York fell to the lowest since 2009, dropping to -10.41. Apple, continued rallying and rose 1.2% dod on news that pre-orders for iPhone 5, topped 2mil units in one day, and exceeded the initial supply.

Overnight Markets

Indices	Last	Change
STI	3078.72	0.3%
HSI	20658.10	0.1%
DJIA	13553.10	-0.3%
S&P 500	1461.19	-0.3%
Nasdaq	3178.67	-0.2%
China A50	7138.73	-2.1%

Corporate News

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Ex-dividend dates:
Wed 26 Sep: SGX ($0.15)
Tue 6 Nov: Olam ($0.05)