Malaysia's CPO inventory level for Aug-12 increased 6% MoM to 2.12m mt and hit the higher range of the consensus estimate of 2.09m'2.14m mt. It was also 2% higher than our estimate of 2.07m mt as production turned out to be better than expected. With the strong CPO production of 1.66m mt outpacing the export volume of 1.43m mt, the inventory level inched up by 0.12m mt to 2.12m mt. On the supply side, we notice signs of waning tree stress. Despite the flattish CPO production at 1.66m mt (-2% MoM), the YoY decline shrank to only 0.3% as compared to July-12's drop of 3% YoY. On the demand side, exports recovered 10% MoM but were still down 16% YoY. Lastly, we believe that a strong El Ni''o is unlikely in the near term because the Southern Oscillation Index (SOI) is currently at neutral level. Due to a lack of strong catalysts for the sector, we are maintaining our NEUTRAL call on the plantation sector. Our average CPO price estimates for CY12-CY13 remained unchanged at RM3,150-RM3,100 per mt. Our top picks are TSH (OP; TP: RM2.85) and UMCCA (OP; TP: RM8.05) for their double-digit FFB growth prospects. We maintain MARKET PERFORM calls  on SIME (TP: RM10.30), IOICORP (TP: RM5.25), KLK (TP: RM24.86), GENP (TP:  RM9.70) and IJMP (TP: RM3.65) and an UNDERPERFORM call on TAANN (TP: RM3.75) due to its timber division weakness.

Aug-12 stocks were reported at 2.12m mt or at the higher end of the consensus estimate of 2.09m-2.14m mt. It was also 2% higher than our earlier estimate of 2.07m mt as the production turned out to be higher than expected. The strong CPO production of 1.66m mt outpaced the export volume of 1.43m mt, causing inventories to inch 0.12m mt higher to 2.12m mt. We expect this trend (production outpacing export) to continue through 3QCY12, keeping inventory levels above 2.0m mt, a psychological range seen as denoting an ample supply of CPO in the market. Hence, the CPO price upside should be limited in the near term.

Production to surge in Sep after the temporary pause in Aug. The CPO production decline of 2% oM in Aug-12 was caused by the fewer number of FFB harvesting days due to the Hari Raya festival. For Sep-12, we expect CPO production to surge 12% MoM to 1.86m mt in line with seasonal factors and the return of the harvesting process to its normal level. Typically, a strong CPO production pick-up will limit the upside for CPO prices due to the abundant supply.

Exports recovered 10% MoM but were down 16% YoY. Exports increased 10% MoM in Aug-12 to 1.43m mt as demand growth was better in all the key CPO consumer countries except Europe and Pakistan. The highest increase was seen in China (+36% MoM to 269k mt) and India (+50% MoM to 259k mt). Both these countries may have purchased more CPO as a cheaper substitute to soybean oil. However, the YoY comparison showed that CPO exports actually tumbled 16%. We believe this could be attributed to the slower economic expansion in China and Europe, which has affected the overall CPO demand growth in both the food and biodiesel industries.

A strong El Ni''o is unlikely in the near term  because the Southern Oscillation Index (SOI) is currently at neutral levels. The latest SOI reading of negative 0.4 (as of 7 Sep) is still at the neutral level. According to the Australian Bureau Of Meteorology, some of its indicators such as trade winds and tropical cloud patterns have yet to show typical El Ni''o signs. Hence, we think that even though there is a possibility for El Nino to return, it is likely to be a weak one causing little excitement to CPO prices.

Prefer young planters, top picks are TSH and UMCCA. We are maintaining our NEUTRAL call on the plantation sector but prefer young planters such as TSH and UMCCA. The average age profile for TSH and UMCCA are at 6.2 and 7.6 years old respectively, which are the youngest among pure planters under our coverage. Due to the high percentage of plantation lands coming into maturity, we expect the double-digit FFB growth rate for TSH and UMCCA to be sustained.