We are Neutral on the plantation sector on the regional basis as most of the stocks under our coverage are trading at fair valuations. Though CPO prices may be in basebuilding mode with some upside, they will remain in broad trading range without clear rerating catalyst. In the near term, these stocks’ upside will be capped by the likely poor 4Q earnings. We maintain our Buy calls on selective stocks, namely First Resources, SOP, Golden Agri and Sime Darby. London Sumatra is downgraded to Neutral following its 26% rise in the past month.
CPO prices hampered by inventory level. With inventory continuing its climb, palm oil price recovery is further delayed. The seasonal decline in production of 5.9% was too mild to halt the rise in stockpile. Nevertheless, production should continue to decline in Jan-Mar, which will help to pare down the record stockpile. Despite this, we think the downside for CPO prices is relatively limited given its parity to Brent Crude, which will trigger demand for use in the energy sector.
New export duty structure. The market is watching the effectiveness of Malaysia’s new export duty structure in encouraging the export of CPO. Under the new structure, CPO export tax is at zero this month. A steep decline in export tax from 23% to zero should have some positive impact on shipment. We should see the effects in these one or two months. Do note that the buildup in inventory in December was in the form of processed palm oil. CPO inventory fell 5.5% m-o-m.
El Nino factor. Despite last year’s false signal, we believe a potential El Nino is still a factor to watch out for. The Southern Oscillation Index (SOI) has been hovering in the negative zone, which suggests a bias towards El Nino.
Neutral on sector. We are downgrading the sector to Neutral on the regional basis, with only Overweight remaining for Singapore’s plantation sector. We are now also Neutral on Indonesia’s plantation following the downgrade of London Sumatra to Neutral. We continue to be selectively bullish on stocks such as First Resources, Sarawak Oil Palms, Golden Agri and Sime Darby.
MPOB STATISTICS FOR DECEMBER 2012
Production continues seasonal weakness. Palm oil production in Malaysia declined for a third consecutive month to 1.780m tonnes in December, down by 5.9% or 110.9k tonnes from November amid a FFB production seasonal downcycle. CPO production from Peninsular Malaysia and Sarawak dipped 7.5% and 10.1% respectively, while Sabah experienced a milder 1.1% drop. On a y-o-y basis, production grew by double-digits for a second consecutive month following dismal 1H output. Production in Peninsular Malaysia and Sabah rose 19.0% and 21.7% respectively, lifting the country to a 19.1% increase. Production for the full-year of 2012 clocked in at 18.785m tonnes, still 0.7% short compared to that of 2011 amid a 5.1% decline in Sabah.
Exports flat. Malaysia exported 1.650m tonnes of palm oil during the last month of 2012, down 0.7% or 11.7k tonnes m-o-m. China led the decline (-151.2k tonnes) while the European Union also cut its purchases (-37.5k tonnes). Meanwhile, increases from India (+77.3k tonnes), Pakistan (+30.2k tonnes) and Bangladesh (+22.0k tonnes) partially mitigated the decline. Exports rose y-o-y for the first time in seven months, nonetheless, as a 132.7k-tonne increase in purchases from India led to 3.7% higher exports y-o-y. Full-year exports in 2012 totaled 17.563m tonnes, 2.4% lower than exports in 2011. Procurement from China and Pakistan fell by 480.5k tonnes (-12.1% y-o-y) and 472.9k tonnes (-26.0% y-o-y) respectively, with India bulking the trend and increasing its purchases by 947.4k tonnes (+56.8% y-o-y).
Inventory continues to inch up. Palm oil inventory in Malaysia rose by 2.4% m-o-m to 2.628m tonnes despite weaker production, most likely to have been driven by weaker domestic consumption. Refined palm oil inventory rose 17.2% m-o-m to 1.052m tonnes while CPO stockpiles eased by 5.5% m-o-m to 1.575m tonnes. The month’s inventory, the highest on record, was 27.6% higher y-o-y. We expect to see further moderation in CPO inventory following Malaysia’s implementation of lower CPO export duties starting January 2013.
Source: OSK
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