Highlights

Inventory climbs on higher production. Palm oil inventory climbed for the first time since Jan-13, by 1% mom to 1.66m tonnes in Jul 13, mainly on higher production that more than offset domestic consumption.

Exports remained flattish, rose by a marginal 1% (mom) to 1.42m tonnes. Higher exports to China (+12.3%) and India (+24.1%) was largely negated by lower exports to Pakistan (- 22.8%), US (-17.7%) and Netherlands (-9.4%). Higher exports to China were due to inventory replenishing ahead of the Mid- Autumm festival.

Total production rose 18.2% mom to 1.67m tonnes, driven by a pickup in production across all areas (Pen. Malaysia; +18.3%; Sabah: +12.8%; Sarawak: +26.8%).

Upside to CPO price will be capped. We are keeping our average CPO price forecasts of RM2,500/tonne and RM2,600/tonne in 2013-14 for now. We believe it is unlikely for CPO price to average at RM2,500/mt this year, as CPO price upside will be capped by seasonally higher production in the coming months (which has already started since Jul) and the absence of fresh demand catalyst.

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 - 15 Aug 2013