We are revising our Mar-13 inventory forecast slightly down to 2.26m mt (from 2.31m mt) after fine-tuning our production and exports estimates. Note that we have cut our March production estimate by 181k to 1.30m mt, which is more than the cut we made in our exports estimate by 136k to 1.45m mt. On the supply side, we believe that the higher security level in Sabah may have caused some disruptions to the FFB harvesting and transportation of CPO there. As for demand, exports to Europe may be affected by the unusually cold weather there in Mar-2013. On the overall, we expect the inventory data to be short term positive to CPO prices. However, we remain UNDERWEIGHT on the plantation sector as we believe that planters’ earnings should continue to disappoint in the May-2013 results season. Note that the average 1QCY13 CPO price was only at RM2324/mt or 19% below the consensus estimate of RM2860/mt. We are maintaining our CY13-CY14 average CPO price forecasts of RM2,500/mt-RM2,700/mt. As such, we are retaining our UNDERPERFORM calls on SIME (TP: RM8.82), IOICORP (TP: RM4.34), KLK (TP: RM19.30), FGVH (TP: RM4.00), GENP (TP: RM7.60), IJMP (TP: RM2.75) and TAANN (TP: RM2.84) due to the low CPO price outlook. Our MARKET PERFORM calls are meanwhile maintained on TSH (TP: RM2.00) and UMCCA (TP: RM6.70). Our only OUTPERFORM call is on PPB (TP: RM15.00) as we expect it to benefit from Wilmar’s earnings recovery (good prospect seen in both its soybean crushing and palm oil downstream divisions).

Expects Mar-2013 inventory to decline 7% MoM to 2.26m mt. We are revising our Mar-13 inventory forecast slightly down to 2.26m mt (from 2.31m mt) after fine-tuning our production and exports estimates. Note that we have cut our March production estimate by 181k to 1.30m mt, which is more than the cut we made in our exports estimate by 136k to 1.45m mt. Note that the actual MPOB data will be released on 10-Mar-2013, where we believe the overall data should be short term positive to CPO prices.

Lower Sabah palm oil production to curb production growth. We believe that the higher security level in Sabah may have caused some disruptions to the FFB harvesting and transportation of CPO there. Note that Sabah contributed 30% of Malaysia’s CPO production in 2012. In the latest production data from IJM Plantation, its March FFB production declined 3.5% MoM to 47,896 mt. We also understand that Genting Plantation’s FFB production increased 1.6% MoM to 113,340 mt in Mar-13. Note, however, that IJM Plantation’s FFB production is very concentrated in Sabah while Genting’s FFB production is derived from diversified locations in Peninsular Malaysia, Sabah and Kalimantan Indonesia.

Europe demand for CPO may weaken MoM due to the unusually cold weather there in Mar-2013. Weather data suggest that Europe has experienced an unexpected cold weather with higher than normal snow in the month of Mar-13. For example, the average weather in Amsterdam in March-2013 was 2.8 degree Celsius as compared to its 5-year average of 6.3 degree Celsius in March. As palm oil tends to solidify in cold weather, its usage in Europe could decline MoM as consumers there shift to other vegetable oils such as rapeseed oil and soybean oil.

Reiterate UNDERWEIGHT as we expect another earnings disappointment in May-2013. Despite our short term bullishness on the CPO price, we are reiterating our UNDERWEIGHT rating on the plantation sector as the consensus is still estimating a 2013 average CPO price of RM2860/mt as compared to the average spot CPO price recorded of just RM2324/mt in 1Q13. This should lead to another earnings disappointment and further pressure the prices of plantation stocks.

Source: Kenanga