Raising tax-free CPO export quota? As reported in the papers, the potential 2m-tonne increase in tax-free CPO export quota, if implemented, is meant to temporarily ease CPO stockpile in the country amid an environment of increasing production and decreasing exports. The move counters most industry players' expectations of a more downstream-friendly policy. We understand that only 10%-20% of the existing full year quota remains prior to the potential 2m-tonne quota increase. Societe Generale de Surveillance (SGS) estimates that Malaysian July palm oil exports declined by 18.5% m-o-m as purchasers switched to cheaper Indonesian palm oil (SGS estimate: +23% m-o-m).

Pure refiners hit hardest. Independent refiners like Mewah International will be the hardest hit as pure CPO producers get more leeway in deciding whether to export their products or sell locally. Peninsular Malaysia refiners, who have paid higher than the rest of the country's average prices for CPO due to the region's excess refining capacity, will likely face further capacity underutilization and thinning refining margins. Meanwhile, Sarawakian refiners are also likely to lose bargaining power but may experience less dire circumstances than their peninsula counterparts in view of the refining capacity shortage in the state. We think integrated players will find the additional quota less of a problem in relation to CPO sourcing if their refineries are self-sustaining. As SOP's own CPO production accounts for 70% of its refinery's capacity, this helps to mitigate concerns of under-utilization.

8% FY12 earnings contraction. In view of 1H2012's weak production, we are toning down our FY12 FFB production growth forecast to 10.3% from 16.1% previously. Nonetheless, this still implies a 20.5% y-o-y growth for 2H2012, in line with our view that production will be skewed towards the 2nd half of the year compared to 2011. Following the production revision, our FY12 earnings expectations are correspondingly cut by 7.7%, implying an 8.4% y-o-y profit contraction.

41% FY13 earnings growth. We recently upgraded SOP's FY13 estimated earnings to RM314.1m, up 5.7% from RM297.1m previously. The upward revision followed our 2013 average CPO price assumption upgrade to RM3,500 per tonne, which led to positive FY13 earnings adjustments across our plantation universe. The move to OVERWEIGHT the plantation sector on 9 July 2012 stems from our belief that palm prices will enter a three-year upcycle soon, fuelled by the possibility of an El Nino occurring in 4QCY12/1QCY13 and a potential peak in Indonesia's production in 2015. We also cut our FY13 production forecast to 1.0m tonnes (+10.2% y-o-y) from 1.08m tonnes previously on expectations that an El Nino will curb output growth.

Maintain BUY. Following our sector-wide earnings revision, we value SOP at RM9.37, based on a 13.0x FY13 PER. Despite our forecast changes and a likely challenging 2QFY12 earnings performance, the company is still trading at an attractive 13.4x FY12 PER and 9.5x FY13 PER. SOP continues to be a BUY and our top Malaysian sector pick for its strong growth prospects and solid management expertise.

Source: OSK