Plantation - OVERWEIGHT - Tree stress effect may have just starte

Malaysia’s CPO inventory level for Mar-12 was reported at 1.96m mt or 2% lower than the consensus estimate of 2.00m mt. It was also 6% below our estimate of 2.08m mt. The key surprise was the better-than-expected exports growth of 11% MoM to 1.34m mt (5% above the consensus and our expectation of 1.28m mt). Judging from the CPO production severe YoY decline of 14% to 1.21m mt in Mar-12, we believe that oil palm trees may have just entered their tree stress period. Typically, CPO production will be flat or decline during its tree stress period. Among the key CPO consumers, the highest export growth was noticed in Pakistan (+125% MoM to 78k mt), Europe (+63% MoM to 174k mt) and India (+11% MoM to 120k mt). The latest USDA WASDE report was bullish to CPO prices as it reaffirmed the global soybean oil shortage for the 2011/12 season. The global soybean oil inventory was cut by 0.17m mt or 6.2% from its previous forecast to only 2.56m mt. All the bullish fundamental  factors mentioned continue to support our OVERWEIGHT call on the plantation sector. We maintain our CY12 average CPO price of RM3,200 per mt but may increase it further if soybean oil production continues to deteriorate in South America.  We  have  OUTPERFORM  calls  on  SIME (TP: RM11.60) and IJM Plantation (TP: RM4.25) on valuation grounds. To leverage on  their  double  digit  FFB  growth,  we  also  have  OUTPERFORM  calls  on  Ta  Ann (RM7.75) and United Malacca (TP: RM8.00). Meanwhile, we maintain MARKET PERFORM calls on KLK (TP: RM23.60), IOI (TP: RM5.60) and GENP (TP: RM9.90).

Mar-12 stocks level below expectation.  The  CPO inventory level of 1.96m mt was 2% lower than the consensus estimate of 2.00m mt.  It is also 6% below our estimate of 2.08m mt. The key surprise was the better-than-expected exports growth of 11% MoM to 1.34m mt (5% above the consensus and our expectation of 1.28m mt). As the exports growth of 11% MoM surpassed the production increase of 2%  MoM, the stocks-to-usage ratio declined to 11.3% in Mar-12 (from 13.5% in Feb-12). On the overall, the meaningful drop in the stocks level to below 2.00 mt is positive for CPO prices.

Tree stress effect has just started. CPO production slumped 14% YoY to 1.21m mt in Mar-12.  The  decline  was  more  severe  than  market  expectations  of  a  7%  to  9%  drop  and  our expectation of a 2% drop. As highlighted earlier  in our sector update report on 27 Mar, we believe that the tree stress effect on oil palm trees has started. Hence, the CPO production upcycle, which has lasted for 12 months (from Mar-11 to Feb-12) should have ended. In Apr-12, CPO production is likely to register a YoY production decline of about 4% to about 1.47m mt. However, our estimate may appear too optimistic at the current juncture as the severity of tree stress effect is still unclear. CPO prices are nonetheless likely to appreciate further as CPO production will be limited as tree stress effects usually last for 2 years.

Strong CPO exports in Mar-12 likely to continue. Exports surged by 11% MoM or 132k mt in Mar-12 to 1.34m mt. Among the key CPO consumers, the highest growth was seen in Pakistan (+125% MoM to 78k mt), Europe (+63% MoM to 174k mt) and India (+11% MoM to 120k mt). The strengthening CPO exports to Pakistan were probably caused by a normalisation process as the Feb-12 number was extremely low (due to transporters’ strike in the country causing closure of the factories). The strong CPO export trend is likely to continue in  April,  judging  from  the  cargo  surveyor’s  estimate  of  an  8%  CPO  export  growth  to  479k  mt in the first 10 days of April. The resilient CPO demand should support CPO prices in 2Q12.

USDA WASDE report bullish for CPO prices.  In the latest World Agriculture Supply and Demand Estimates report released on 10 Apr, USDA has reduced its 2011/12 season global soybean oil inventory by 0.17m mt or 6.2% from its previous forecast to only 2.56m mt. As a result, the 2011/12 season global soybean oil stock-to-usage ratio declined by 41pp to 6.08% from last month’s estimate of 6.49%. Soybean oil production from South America has meanwhile been severely affected by bad weathers. Argentina soybean oil production forecast has been reduced by 0.13m mt or 1.7% to 7.30m mt while Brazil soybean oil production has been  cut  by  0.11m  mt  or  1.6%  to  6.81m  mt.  CPO  prices  will  benefit  from  this  as  it  is  usually used as a substitute for soybean oil.  


Source: Kenanga