CIMB Research said it expects the plantation sector's return on equity to hit bottom this year before recovering in 2013, despite a flat crude palm oil (CPO) p r ice assumption.
"ROE dips in 2012 due to lower price and higher cost. Cost normalisation and higher output should lift the average ROE by 4% pts in 2013," CIMB wrote in a note on Monday.
The research house said ROE seems to be a better determinant of medium-term valuation levels compared to CPO price movement and keeping the sector's rating as 'overweight'.
"ROE recovery despite our flattish CPO price outlook makes the sector an attractive medium-term investment given its historical medium-term correlation with ROE. However, CPO price remains a short-term catalyst for the sector. We continue to advocate collecting Indonesian planters in anticipation of a likely CPO price rally," the note said.
CIMB's said its top pick in the sector is PT Astra Agro Lestari. It said the company would be the biggest winner for its pure play and because it has the highest earnings sensitivity, ample liquidity, sound corporate governance and solid production growth.
Astra Agro's shares were down 2.17 percent at 22,500 rupiah while the broader index was up 0.18 percent.
1126 (0526 GMT) (Reporting by Andjarsari Paramaditha)