Plantation - Stubbornly high Jan-13 inventory

Although Malaysia’s CPO inventory level for Jan-13 declined 2% MoM to 2.58m mt, it was still 28% higher YoY. The data also came in  higher than the consensus estimate of 2.54m mt but is close to our estimate of 2.57m mt. CPO production remained strong in the month as it recorded a strong recovery from the tree stress effect. As a result, the month’s production declined only 10% MoM against the consensus estimate of a 15% decline. Meanwhile, exports remained weak at 1.62m mt (-2% MoM) due to a decline in exports to China (-23% MoM to 268k mt) and India (-35% MoM to 172k mt). Looking forward, we believe that the stock level could decline a further 4% MoM to 2.48m mt in Feb-13 in line with the seasonal production decline. Despite declining inventory trend, we think that the inventory trend will not drop below 2.0m mt throughout 1QCY13 due to weak exports. On the overall, we view the latest inventory data negatively as sustained high stocks level should keep CPO prices upside limited. We reiterate an UNDERWEIGHT rating on the plantation sector given our strong conviction that 4QCY12 earnings will be a major disappointment due to the extremely low average CPO price of RM2170/mt (-27% YoY and -24% QoQ) in the quarter. We are also maintaining our CY13-CY14 average CPO price forecasts of RM2,500/mtRM2,700/mt. We are keeping our UNDERPERFORM calls on SIME (TP: RM8.82), IOICORP (TP: RM4.34), KLK (TP: RM19.30), FGVH (TP:  RM4.00), GENP (TP: RM7.60), IJMP (TP: RM2.60) and TAANN (TP: RM2.84) due to the low CPO price outlook. Our MARKET PERFORM calls are also retained on TSH (TP: RM2.00) and UMCCA (TP: RM6.70). Our only OUTPERFORM call is on PPB (TP: RM14.38) as we expect it to benefit from Wilmar’s earnings recovery due to the turnaround in its soybean crushing and palm oil downstream margins.

Inventory declined 2% MoM to 2.58m mt but was still 28% higher YoY. The decline was within our estimate of 2.57m mt but was 2% higher than the consensus estimate of 2.54m mt. The production level turned out to be stronger than expected as it declined only 10% MoM to 1.60m mt against the consensus expectation of a 15% decline MoM to 1.51m mt. This could be caused by a stronger than expected recovery from the tree stress effect, which ended about 5 months ago. Meanwhile, exports remained weak at 1.62m mt (-2% MoM) due to a decline in exports to China (-23% MoM to 268k mt) and India (-35% MoM to 172k mt). On the overall, we view the data negatively as the high inventory level should keep CPO prices at current depressed levels for an extended period.

Stocks may decline 4% to 2.48m mt but to stay above 2.0m mt throughout 1QCY13.  The key reason for the falling stock level is the expected production decline of 8% MoM to 1.47m mt in Feb due to the seasonal factor. While we also expect lower exports at 1.54m mt, the decline rate of 4% MoM is likely to be less severe as compared to the production decline of 8% MoM. As the northern hemisphere will still be in the winter season in Feb, palm oil usage should remain low. Despite the declining inventory trend, we think that the Malaysian inventory level will not drop below 2.0m mt throughout 1QCY13 due to the weak exports. This should keep CPO prices staying below RM3000/mt in 1QCY13.

A strong El Niño is unlikely in the near term  because the Southern Oscillation Index (SOI) is currently at a neutral level. The latest SOI reading of negative 7.5 (as of 10 Feb) is still at a neutral level. Note that SOI readings ranging from negative 8 to +8 indicate neutral ENSO levels (no El Nino or La Nina). Together with the absence of weather disruptions in 2011 and 2012, CPO supply should thus be good this  year. This means there will be little excitement for CPO prices.

Reiterate UNDERWEIGHT, major earnings disappointment soon. We reiterate our view that planters’ earnings are poised to dive at least 30% YoY and 20% QoQ when their financial results are announced by end Feb-2013. This should  be in line with 4QCY12 average CPO price, which had tumbled 27% YoY and 24% QoQ. We believe planters’ 4QCY12 earnings will likely fall by at least the same magnitude as CPO prices tend to have a very significant impact on their earnings historically. Since we think that the consensus have yet to reflect this in their earnings forecasts, another round of deeper consensus earnings cut is likely ahead.

Sourec: Kenanga