Plantation - Stocks level jumped 18% MoM to 2.0m mt

Malaysia’s CPO inventory level for July-12 jumped 18% MoM to 2.00m mt and hit the higher range of the consensus estimate of 1.87m – 2.00m mt. It was also 2% higher than our estimate of 1.97m mt as production turned out to be better than expected. As production surged 15% MoM while exports tumbled 15% MoM, the stocks-to-usage ratio jumped significantly to 11.3% in July-12 (above its 3-year average level of 9.6%). On the supply side, we notice signs of waning tree stress as the CPO production increased 15% MoM to 1.69m mt in July-12 and caused the YoY  decline  to  shrink  to only  3%  as  compared  to  Jun-11  drop  of 16%  YoY. On  the demand side, demand growth was lower in all key CPO consumer countries except Europe. In view of the coming 2QCY12 result which we expect will be below the consensus estimates, we are maintaining our NEUTRAL call on the plantation sector. Our average CPO price estimates  for CY12-CY13 remained unchanged at RM3,150-RM3,100 per mt. Our top picks are TSH (OP; TP: RM2.85) and UMCCA (OP; TP: RM8.05) for their double-digit FFB growth prospects. We are maintaining MARKET PERFORM on SIME (TP: RM10.30), IOICORP (TP: RM5.25), KLK (TP: RM24.86), GENP (TP: RM9.70), IJMP (TP: RM3.65), and TAANN (TP: RM4.60).

July-12 stocks at the higher end of consensus estimate. The CPO inventory level jumped 18% MoM to 2.00m mt and hit the higher range of the consensus estimate of 1.87m – 2.00m mt. It was also 2% higher than our earlier estimate of 1.97m mt as production turned out to be stronger than expected. As production surged 15% MoM while exports tumbled 15% MoM, the stocks-to-usage ratio jumped significantly to 11.3% in July-12 (from 8.4% in Jun-12). On the overall, the higher output and tepid demand for CPO has pushed stocks-to-usage ratio above its 3-year average level of 9.6%, hence this should keep CPO prices upside limited in the near term.

Strong production recovery of 15% MoM. CPO production showed signs of waning tree stress as it increased 15% MoM to 1.69m mt in July-12 and caused the YoY decline to shrink to  only  3%  as  compared  to  Jun-12  drop  of  16%  YoY.  This  trend  of  waning  tree  stress  effect should continue in 2H12 and we expect the tree  stress effect to officially end in either Sep-2012 or 4Q12 as the first YoY production increase will be seen. Typically, a strong CPO production pick-up will keep the upside for CPO prices limited due to the abundant supply.

China and India CPO demand slowing down.  Exports tumbled 15% MoM in July-12 to 1.30m mt as the demand growth was lower in all key CPO consumer countries except Europe. The highest decline was seen in India (-39% MoM to 173k mt), China (-37% MoM to 198k mt) and Pakistan (-35% MoM to 128k mt). India and Pakistan may have finished their stocking activities ahead of Ramadhan in Jun-12 leading to weaker export numbers in July-12. Exports to China may normalise after its strong jump of 38% MoM in Jun-12 to 316,000 mt. In addition, China may have slowed down its purchase in July especially after the strong surge in CPO prices in early July.

Expect weak 2QCY12 result.  Out of the seven planters under our coverage who will be releasing their quarterly results in August, we expect  five  of  them  to  report  earnings  which will trail the consensus estimates. This will  likely be due to a lower-than-expected FFB production in 1HCY12 due to the worse-than-expected tree stress condition. Hence, we believe the consensus may cut their earnings significantly post-2QCY12, resulting in weaker planters’ share prices.

Prefer young planters, top picks are TSH and UMCCA. We are maintaining our NEUTRAL call on the plantation sector but prefer young planters such as TSH and UMCCA. The average age profile for TSH and UMCCA are at 6.2 and 7.6 years old respectively, which are the youngest among pure planters under our coverage. Due to the high percentage of plantation lands coming into maturity, we expect the double-digit FFB growth rate for TSH and UMCCA to be sustained.

Source: Kenanga