Malaysia’s palm oil inventory level for Mar-13 declined 11% MoM to 2.17m mt. The data was 4% below the consensus estimate of 2.27m mt as exports surprised on the upside. We gather that exports grew 10% MoM to 1.54m mt as exports to China surged 77% MoM to 418k mt. We believe this should have been due to the higher than expected demand recovery in China as the temperature turned warmer in March. Looking ahead, we believe that the stock level could fall below 2.0m mt soon to 1.98m mt by end of Apr-13. The trend of declining inventories may continue to 1.82m mt by Jun-13 as demand should continue to outpace supply in the short term. On the overall, we view the latest inventory data positively and we expect CPO prices to recover in 2Q13 to RM2800/mt. However, we reiterate an UNDERWEIGHT rating on the plantation sector given that 1QCY13 earnings should continue to disappoint given that the consensus is still estimating an average 2013 CPO price of RM2,860/mt. Meanwhile, we are maintaining our CY12-CY13 average CPO price forecasts of RM2,500/mt-RM2,700/mt. We are maintaining 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 and our MARKET PERFORM calls 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 (from a better soybean crushing margin).

Latest inventory level declined 11% MoM to 2.17m mt, 4% below the consensus estimate of 2.27m mt. The number was also 4% lower than our expectation of 2.26m mt. Exports turned out to be stronger than expected at 1.54m mt (+10% MoM) as export to China surged to 418k mt (+77% MoM). We believe this have been due to the higher than expected demand recovery in China as the temperature turned warmer in March. Note that winter has ended in February and palm oil is now usable again in China during the current warmer season. The strong exports jump was more than enough to cover the expected lower exports to India (-66% MoM to 64k mt) and European Union (-37% MoM to 137k mt). The stocks-to-usage ratio declined substantially to 10.7% in Mar-13 (from 13.2% in Feb-13 and 11.3% in Mar-12). For the first time in nine months, the stock/usage ratio is now lower YoY and this supports our short term bullish view for CPO prices.

Stocks may fall below 2.0m mt soon, 1.82m mt by Jun 2013. Given the significantly lower than expected stocks level in Mar-2013, we have lowered our Apr-2013 stock level forecast by to 1.98m mt (down by 9% MoM). We expect Apr-13 palm oil exports of 1.54m mt to outpace the production of 1.40m mt based on our preliminary estimate. On the demand side, we expect exports to stay flat MoM given the strong exports recorded in Mar-13. Palm oil demand from the northern hemisphere should improve MoM except for China, which may slow down its purchase after a strong pick-up last month. On the supply side, our estimated production growth of 6% MoM is in line with the historical seasonal production trend. On the overall, we expect CPO prices to recover in 2Q13 to RM2800/mt as we expect a sustained decline in the inventory level to 1.82m mt by Jun 2013.

However, we are reiterating our UNDERWEIGHT rating as we expect another earnings disappointment in May-13. Despite being short term bullish on the outlook for the CPO price, we are reiterating our UNDERWEIGHT rating on the plantation sector as a whole 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 counters.

Source: Kenanga