Plantation - October inventory data may increase further

We expect the upcoming MPOB data (expected release  date on 12-Nov) to be uninspiring as inventory is poised to increase further to another record high of 2.65m mt (+7% MoM and +27% YoY).  However, the high inventory should already been reflected in current very high discount of CPO against soybean oil at more than US$250/mt. MoM, exports should grow 10% to 1.66m mt from a low base as the huge discount of CPO against soybean oil should have attracted more demands. However, against an expected much higher CPO production of 1.92m mt, the exports growth of 10% will still not be enough  to reduce the inventory in October. Going forward, we expect China and US demands for CPO to improve in line with their recent better economic data, leading to the CPO price* to increase gradually from its current level of RM2,300/mt-RM2,400/mt. Despite the expected rise, we do not think that the price will return to 2012 high of RM3568/mt anytime soon. We are maintaining our CY12-CY13 average CPO price of RM2,975-RM3,000, which is below the consensus average of RM3050-RM3025. We continue to like young planters and are maintaining OUTPERFORM calls on TSH (TP: RM2.70) and UMCCA (TP: RM7.65) for their double-digit FFB growth prospects. We maintain meanwhile our MARKET PERFORM calls on SIME (TP: RM9.80), IOICORP (TP: RM5.20), KLK (TP: RM22.30), PPB (TP: RM14.60), 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.

Expect another record-high inventory data for October. We expect the upcoming MPOB data (expected release date on 12-Nov) to be uninspiring as inventory is poised to increase further to another record high of 2.65m mt (+7% MoM and +27% YoY) from 2.48m mt in September. Although we expect a good palm oil exports volume of 1.66m mt (+10% MoM but -10% YoY), we believe that the palm oil production level will be much higher at 1.92m mt (-4% MoM but +1% YoY). Overall, the high inventory should keep the CPO price upside limited in the near term.

Low CPO price should keep exports growing at 10% in Oct.  We have assumed an exports growth of 10% MoM in October as the current low CPO price should have encouraged more exports. Note that CPO is trading at a very high discount against soybean oil with an average of US$370/mt in October. This is more than double the 5-year average discount of US$158/mt and we expect this to drive demand from soybean oil towards palm oil. But the high palm oil production of 1.92m mt means that the 10% export growth will still not be enough. We expect CPO production to stay near its peak at 1.92m mt in October, although it should decline slightly by 4% MoM in view of the high rainfalls, which could have affected the harvesting process. The high CPO production is in line with the seasonal factor, with MPOB data showing that CPO production peaked in October in the past three years. 

China and US demands for CPO may improve in line with their better economic data.  China’s Purchasing Managers Index (PMI) climbed to 50.2 in October (against 49.8 in September), possibly signaling that its economy has improved after two rounds of interest rate cut in Jun and July this year. In US, the Institute for Supply Management (ISM) manufacturing index has improved slightly to 51.7 in October (against 51.5 in September). We expect CPO demand to increase in tandem with the better economy outlook in these countries. Hence, the CPO price should increase gradually from its current level of RM2,300-RM2,400 once the high inventory level is cleared.

Stay with young planters like TSH and UMCCA.  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 prospects for TSH and UMCCA, we expect their earnings to be more resilient than other planters.

Source: Kenanga