Malaysia’s CPO inventory level for Oct-12 reached another record high of 2.51m mt but came in lower than the consensus estimate of 2.68m mt. The better performance was caused by the higher than expected exports growth of 16% on a MoM basis, which beat the consensus expectations of 10%. Low CPO prices throughout October at the average of RM2243.50 (-18% MoM) and its high discount of US$370/mt against soybean oil could have spurred the exports growth, leading palm oil to regain more market shares from soybean oil. We believe the stock level could have peaked in Oct and we expect it to decline to 2.45m mt in Nov. CPO production should decline 8% MoM in Nov, consistent with its historical seasonal production pattern. We also think exports should continue to grow at 5% MoM due to support by the persistent discount gap against soybean oil. Nonetheless, we still maintain our NEUTRAL call on the plantation sector as the latest USDA projection of a better soybean oil production could limit the upside on CPO prices. We believe any significant increase in CPO prices may cause demand to shift back to soybean oil. We are maintaining our CY12-CY13 average CPO price forecasts of RM2,975-RM3,000, which are below the consensus average of RM3050-RM3025. We continue to like young planters and maintain our OUTPERFORM calls on TSH (TP: RM2.70) and UMCCA (TP: RM7.65) for their double-digit FFB growth prospect. Meanwhile, we are maintaining MARKET PERFORM calls on SIME (TP: RM9.80), IOICORP (TP: RM5.20), KLK (TP: RM22.30), PPB (TP: RM14.60), FGVH (TP: RM4.65), GENP (TP: RM9.00) and IJMP (TP: RM3.35). Our UNDERPERFORM call on TAANN is retained (TP: RM3.40) due to its timber division weakness.
Another record-high inventory level, although lower than the consensus estimate. Despite reaching another record high, October’s inventory level of 2.51m mt (+1% MoM) was actually lower than the consensus estimate of 2.68m mt and our estimate of 2.65m mt. The better performance was mainly caused by the stronger than expected exports growth of 16% MoM (the consensus expecting a lower 10% MoM growth). We believe that the low CPO prices throughout October at the average of RM2243.50 (-18% MoM) and its high discount of US$370/mt against soybean oil could have caused palm oil to regain back some sales from soybean oil. The stocks-to-usage ratio declined significantly to 10.6% in Oct-12 (from 12.4% in Sep-12) but remained above its 3-year average level of 9.6%. Overall, we view the data positively as CPO prices should have found a bottom.
Stock level likely to have peaked in Oct, seen declining to 2.45m mt in Nov. Based on our seasonal trend analysis, we expect Nov production to fall 8% MoM to 1.78m mt. We also expect exports growth to continue at a rate of 5% MoM to 1.85m mt in Nov as the low CPO prices should continue to stimulate demand. Cargo surveyor data showed that CPO exports grew a strong 16% MoM in the first 10 days of November, which we think may have been caused by the last minute stock-up ahead of the Deepavali and Hari Raya Haji festivals in midNovember. However, the exports growth for the whole month should average down to a lower 5% in the absence of the festivals demand in the second half of the month.
Latest USDA projection of a higher soybean oil supply may limit the upside for CPO price. The latest USDA forecast for 2012/2013 soybean oil production came in higher than the consensus expectation as its forecast of 2.971b bushels exceeded the market expectation of 2.892b bushels. This higher forecast was mainly due to the late-season rainfalls in several US states, which were beneficial to soybean yield. We believe the USDA data is negative for CPO prices in the short term as a higher soybean oil supply (leading to a lower soybean oil price) may curb the demand for CPO. Nevertheless, the CPO price should still fare better than soybean oil in view of its current deep discount of US$320/mt against the latter.
Young planters earnings like TSH and UMCCA are more resilient due to their better FFB growth prospects. These players boast average tree age profiles of just 6.2 and 7.6 years old respectively, the youngest among pure planters under our coverage. Due to the double-digit FFB growth prospect of TSH and UMCCA, we expect their earnings to be more resilient than other planters.
Source: Kenanga
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