Highlights

Inventory climbs on higher production. Palm oil inventory in Aug-13 continued to climb for the 2nd consecutive month, by 0.1% mom to 1.67m tonnes, mainly on higher output and lower domestic consumption that more than offset higher exports.

Exports grew 7.4% mom to 1.52m tonnes, mainly on higher exports to China (+10.2%) and Netherlands (+47%), which more than mitigated lower exports to India (-3.1%), Pakistan (- 20.6%) and the United States (-29.2%). We note that exports to China has been rising for 3 consecutive months, and we believe this was driven mainly by relatively low inventory level there and stocking ahead of mid-Autumn festival.

Total production growth slowed from 18.2% (in Jul-13) to 3.6% mom (to 1.74m tonnes) mainly due to shorter working month (arising from Raya holidays).

Inventory to remain on the uptrend. We are holding to the view that inventory will remain on the uptrend for the next few months on the back of: (1) Seasonally higher production; (2) The absence of seasonal demand that will result in exports growth to China tapering off; and (3) The depreciation of Rupee, coupled with bumper soybean crop in India which will affect India’s demand for palm oil.

We are still keeping our average CPO price projections unchanged at RM2,500/tonne and RM2,600/tonne in 2013 and 2014 respectively, pending further review with downward bias.

Underweight stance on the sector reiterated.

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: RM10.17)

Source:Hong Leong Investment Bank Research - 11 Sep 2013