Plantation - Dorab Mistry turned less bearish on CPO Prices

According to Dorab Mistry (director at Godrej International Ltd), CPO prices are expected to rise to RM2,400 to RM2,700 ringgit ($770 to $865) per mt by the end of May due to lower stocks level and output. He believes that Malaysia palm oil inventory will fall below 2.0m mt in Jun-2013. We generally agree with Dorab Mistry’s short term view as we are already bullish on near term CPO prices as we expect exports to improve 14% MoM to 1.59m mt. In 2QCY13, we believe CPO prices could improve up to RM2,800/mt. However, we do not think Malaysia palm oil inventory will reach 2.0m mt as we believe it should reach the lowest level of 2.27m mt by April 2013 before increasing slightly to 2.31m mt by June 2013.

Despite our short term bullishness on CPO prices, we reiterate an UNDERWEIGHT rating on the plantation sector given that the consensus is still estimating an average 2013 CPO price of RM2880/mt (against ours at RM2500/mt). This should lead to another earnings disappointment in the next earnings season in May-2013. Maintain 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: RM2.75) and TAANN (TP: RM2.84) due to the low CPO price outlook. Maintain MARKET PERFORM calls on TSH (TP: RM2.00) and UMCCA (TP: RM6.70). Our only OUTPERFORM call is on PPB (TP: RM15.00) as we expect it to benefit from Wilmar’s earnings recovery (resulting from better margin in soybean crushing margin).

Dorab Mistry turned less bearish on CPO prices. According to Dorab Mistry (director at Godrej International Ltd), CPO prices are expected to rise to RM2,400 to RM2,700 ringgit ($770 to $865) per mt by the end of May due to lower stocks level and output. He believes that Malaysia palm oil inventory will fall below 2.0m mt in Jun-2013. We gather that his latest CPO prices projection has been less bearish than his previous forecast made during 6-March-2013 in Kuala Lumpur (CPO prices falling below RM2,200 from mid-April onwards). However, he maintained his bearish view in 2H2013 and expects CPO prices to drop below RM2,000 after August-2013 due to high production season, declining energy prices and strong US Dollar.

We are short term bullish on CPO prices too. We generally agree with Dorab Mistry’s short term view as we are already bullish on near term CPO prices in March but do not expect it to increase beyond RM2700/mt. Recall that in our last report on 12-March-2013, we already stated that Malaysia inventory could decline further by 5% MoM to 2.31m mt in Mar-13. We reiterate our view that March exports should increase by 14% MoM to 1.59m mt as palm oil demand should increase after the winter season in the northern hemisphere ended last month in February.

However, we do not think inventory will touch 2.0m mt. We only expect inventory to fall to the lowest level of 2.27m mt by April-2013 before increasing slightly to 2.31m mt by Jun-2013. As inventory stays low in 2QCY13, we expect CPO prices to peak at RM2800/mt. We think our more bullish CPO price outlook (against Dorab Mistry) is due to our better outlook on crude oil prices. Despite our short term bullishness on CPO, 2H13 outlook remains challenging when high production season starts. However, we think that CPO prices should not fall below RM2,000 in 2H13. We believe that CPO prices bottom in 2H13 should be RM2,100/mt as US biodiesel industry demand for palm oil biodiesel will be strong at such prices assuming WTI Crude Oil stays above US$90/mt.

Reiterate UNDERWEIGHT, looking ahead to another earnings disappointment in May-2013. As the consensus is still estimating 2013 average CPO price of RM2880/mt as compared to the average CPO price of RM2310/mt in the first two months of 2013, we believe that 1QCY13 earnings will likely to disappoint again.

Source: AmeSecurities