Highlights

1Q average CPO price rebounded circa 15% from low in Dec- 12 but still 17% below our assumption and needs average RM2,960/MT (27% higher vs. 1Q) for the remaining 9 months to achieve our projection. Hence, there is a high possibility that it will average lower than our forecast of RM2,800/mt as:

1. It takes time for the current high stock level to diminish. According to cargo surveyor data, palm oil exports in Mar- 13 advanced mom for the first time in four months. However, we believe the increase in exports will unlikely bring down the inventory level significantly as low production cycle historically ends in Feb, which means higher production for the next few months; and

2. 2013 prospective plantings in the US do not bode well for vegetable oil price. Despite the slight 0.1% decrease in 2013 planted acreage, we believe soybean output will still likely come in higher than 2012, assuming weather normalizes. If this turns out to be the case, we believe soybean oil price will come under pressure, hence narrowing its premium against the CPO.

Despite the disconnection between CPO price and KL Plantation Index since mid-12, we still believe that share prices of plantation players will be due for downward adjustments, when earnings disappointments continue in the next 1-2 quarters.

We are keeping our average CPO price forecast of RM2,800/mt for 2013 and 2014 for now and will only revisit towards mid-13, pending for more certainties on FFB output and exports demand.

Catalysts (downside)

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO;
• India imposes import tax on CPO; and
• Longer-than-expected CPO price recovery path.

Risks

• Earlier-than-expected recovery in the world’s major economies, resulting in higher edible oil demand and prices;
• Weather uncertainties revisit, which would result in supply distortion, hence boosting prices of edible oil; and
• Further action from the Malaysian Government to boost competitiveness of downstream plantation players.

Rating

UNDERWEIGHT

• Negatives – (1) Weak global economic outlook; (2) Impending excess supply of CPO; (3) Demand risks from major vegetable oil consuming countries; and (4) Pricey valuations.
• Positive – CPO is still relatively cheaper than soybean oil.

Top picks

• CBIP (BUY; TP: RM3.41)

Source: Hong Leong Investment Bank Research - 05 Apr 2013