We believe a correction in CPO price has begun and
production in the months ahead will be stronger. A subsequent price lull should
take place as early strong demand is matched by ample supply. We may need to upgrade our CPO price assumption
in the months ahead. Smaller growth stocks have been largely the sector
outperformers, while the performance of larger stocks (which are the sector’s
proxy) has been flat. We believe this will continue to be the case until the CPO
price correction is over and hence, quality growth stocks should continue to be
bought. Maintain Neutral on sector.
CPO price in
correction mode. In our previous sector report dated 13 March 2012, we indicated
that CPO price could still have some further upside due to potentially disappointing
March production. CPO price indeed rallied another RM311 per tonne or 9.4% to a
peak of RM3,628. Now that CPO price has rallied to the RM3,500–RM3,600 range
during the low crop season, we believe some pullback is in order.
Production charges
on. Early data points suggest that Indonesia’s production continued to be
strong this year, while Malaysia’s production is exiting its seasonal trough a
little earlier than expected. We also learnt during our visit to South
Kalimantan that production in the months ahead will be strong judging from the
FFB formation.
Soybean vulnerable to
pullback. Soybean has inched up further with speculative net long positions
hitting a record high, surpassing the previous
peak by some 25%. We continue to be concerned about a long liquidation,
especially with Brazil’s completion of its harvesting season this month and
USDA’s planting intention number showing only 1% decrease in soybean planting
acreage.
Neutral on sector.
Our view that palm oil price will rally and peak in 1Q took longer than expected
to unfold as the rally stretches into April. The average palm oil price of RM3,248
per tonne is matching last year’s average and
exceeds our assumption of RM3,000. We may need to raise our CPO price
assumption slightly but are maintaining our Neutral call as large caps should
languish amid the CPO price correction.
Source: AmeSecurities
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