Highlights

Inventory level continued to decline. Palm oil inventory declined for the 6th consecutive month, by 9.3% mom to 1.65m tonnes in June 13, mainly on lower imports and higher domestic consumption, which altogether more than offset a 2.3% mom rise in output.

Exports were flat mom, rose by a marginal 0.3% mom to 1.41m tonnes, Lower exports to India (-37.9%) and the US (- 14.5%) were offset by higher exports to China (+16.2%), Pakistan (+13.5%) and Netherlands (+10.3%).

Total production rose by 2.3% mom to 1.42m tonnes, driven by higher production in Peninsular Malaysia (+6.8%) and Sarawak (+7.0%) which more than offset an 8.2% decline in Sabah’s production.

Inventory to resume on uptrend soon. We believe the lower inventory level in June will unlikely boost CPO price significantly, as inventory level will likely resume on an uptrend in July on the back of the absence of seasonal demand hike (according to Intertek, palm oil exports for the first 10 days of July declined by 16% mom) and higher palm production in the coming months.

We are keeping our average CPO price forecasts of RM2,500/tonne and RM2,600/tonne for 2013 and 2014.

With the subdued CPO price outlook, we believe earnings growth of plantation companies will be coming from: (1) CPO output growth; (2) Downstream segment expansion in Indonesia that will complement the upstream plantation segment there; and (3) Companies with significant property land bank (where property earnings will cushion earnings from current low CPO price environment).

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.
• 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; and (2) Impending excess supply of CPO.

Positive – CPO is still relatively cheaper than soybean oil.

Top picks 

For exposure in the sector, our top picks are and CBIP (BUY; TP: RM3.42) and Genting Plantations (HOLD; TP: RM10.57).

Source: Hong Leong Investment Bank Research - 11 Jul 2013