Plantation - February inventory within expectation

Malaysia’s palm oil inventory level for Feb-13 declined 5% MoM to 2.44m mt but it was still 19% higher YoY. The data was within consensus estimate of 2.43m mt but was lower than our estimate of 2.48m mt due to the unexpected flood in Miri, Sarawak. The flood may have curb the FFB harvesting process there and caused Sarawak’s production to decline 20% MoM to 189,797 mt (more severe than the national decline rate of 19% MoM). Meanwhile, exports remained weak at 1.40m mt (-14% MoM) due to a decline in exports to China (-12% MoM to 237k mt). We believe this should be caused by the high inventory situation at China ports which have slowed down purchases. Looking forward, we believe that the stock level could decline further by 5% MoM to 2.31m mt in Mar-13 (exports in the month of March is expected to pick up 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. Hence, we are bullish on short term CPO prices in March but do not expect it to increase beyond RM2700/mt. In 2Q13, we expect CPO prices to peak at best at RM2800/mt before declining in the second half of the year when the high production season starts. We reiterate an UNDERWEIGHT rating on the 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).

Latest inventory decline of 5% MoM to 2.44m mt was within the consensus estimate of 2.43m mt. However, it was lower than our estimate of 2.48m mt as production turned out to be weaker than expected. We believe that the unexpected recent flood in Miri, Sarawak may have curbed the FFB harvesting process there and caused Sarawak’s production to decline 20% MoM to 189,797 mt. Note that the 20% decline rate MoM in the state’s production is higher than the national decline rate of 19%. Meanwhile, exports remained weak at 1.40m mt (-14% MoM) due to a decline in exports to China (-12% MoM to 237k mt). We believe this should be caused by the high inventory situation at China ports, which may have slowed down purchases. Overall, we are neutral on the news as the inventory level of 2.44m mt is still 19% higher YoY and this should limit the gain in CPO prices.

Stocks may decline 5% to 2.31m mt in Mar-2013 but to stay above 2.0m mt throughout 1HCY13. The key reason for the falling stock level is the expected pick-up in exports by 14% MoM to 1.59m mt in March as the winter season in the northern hemisphere ended last month in February. Note that palm oil tends to solidify in the cold season. While we also expect the production to increase to 1.48m mt, it should be lower than the total exports of 1.59m mt and thus leading to a lower inventory level MoM. Hence, we are bullish on short term CPO prices in March but do not expect it to increase beyond RM2700/mt. Looking beyond 1Q13, the declining inventory trend should be short-lived and to reach its lowest level in April at around 2.20m-2.30m mt. Hence, CPO prices should peak at best at RM2800/mt in 2Q13 before declining in the 2H of the year when the high production season starts.

A strong El Niño is unlikely in the near term because the Southern Oscillation Index (SOI) is currently at positive 8.4 or close to 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, the CPO supply should thus be good this year. This means there will be little excitement for CPO prices.

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: Kenanga