We maintain Overweight on the sector as we view the recent share price weakness as an opportunity to buy plantation stocks. September tends to be weak month for CPO price followed by a strong 4Q. We believe the substitution of soybean due to supply shortfall will accelerate as the US harvesting season progresses, especially given the substantial discount palm oil is trading at. We deem First Resources, Sarawak Oil Palms and Kulim the best stocks to own.
The September effect. Palm oil price is usually weak in September, possibly since production peaks during the month, during which there may potentially be high inventory. Based on the MPOB benchmark price, September has seen negative returns for palm oil price 16 times in the past 21 years since 1992. October is a far more positive month, showing positive returns 65% of the time. That said, 4Q is also typically the best quarter for palm oil price as well as the Plantation Index. This should mean that September may be the best time to buy plantation stocks.
Exports still robust. Despite the prevailing concerns over a demand slowdown, we have yet to detect any signs of this happening. India’s YTD edible oil purchases continue to hit record highs while China’s purchases have held steady. In the first 25 days of September, Malaysia’s palm oil shipments jumped 11.3% m-o-m, led by a 94.7% surge in exports to India and 47.0% increase to China.
Substitution effect. As thepoor US soybean crop fuels the need for alternative sources of edible oil, the search for substitutes will intensify as the Sept to Nov harvesting season in the US from progresses. We estimate that the lower US yield will give rise to demand for 1.8m tonnes of substitutes, which will be mainly palm oil.
Our long term bullish case. We believe palm oil price will strengthen as the commodity’s production in Indonesia decelerates starting next year and reaches a plateau in 2016 as its trees age. As Indonesia’s production was instrumental in driving palm oil supply growth in the past five years, slower production growth will lead to weaker global palm oil supply growth and consequently, higher palm oil prices.
Source: OSK
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