Malaysia’s palm oil inventory level for May-13 declined 5% MoM to 1.82m mt. The total demand (exports + domestic disappearance) of  1.53m mt continued to exceed the total supply (production + imports) of 1.43m mt and this caused stocks to deplete by another 0.10m mt. However, exports declined slightly by 3% MoM to 1.41m mt as exports to China fell 31% MoM to 418k mt. We believe this was likely caused by the high inventory situation in the country, which has dampened demand. Looking forward, we believe that the stock level could fall below 1.75m mt by Jun-13 as the total demand should stay strong at level similar to May. Note that demand from Northern Hemisphere should continue to be strong due to the warm weather there. On the overall, we view the latest inventory data as mildly positive and we expect CPO prices to recover in the near term. We are putting the Plantation sector UNDER REVIEW with potential small earnings/Target Price increases of less than 10%. Our current CY13-CY14 average CPO price forecasts are at RM2,500/mt-RM2,700/mt. Our current calls are MARKET PERFORM on SIME (TP: RM9.80), IOICORP (TP: RM5.40), KLK (TP: RM21.86), FGVH (TP: RM4.60), GENP (TP: RM9.00), IJMP (TP: RM3.38) and TAANN (TP: RM3.55). We also currently have OUTPERFORM calls on PPB (TP: RM15.20), TSH (TP: RM2.44) and IJM Plantation (TP: RM3.38).

Latest inventory level declined 5% MoM to 1.82m mt  and this was within the consensus estimate.  Although exports weakened slightly by 3% MoM to 1.41m mt, it managed to stay higher than the production level of 1.38m mt and this caused the inventory level to decline for the fifth consecutive month. On the demand side, palm oil exports were weaker MoM due to lower exports to China (-31% MoM to 232k mt) as the high inventory situation there had dampened demand. On the supply side, palm oil production was flat MoM at 1.38m mt as the tree stress effect may have started in May-2013. On the overall, the weak demand should not impact CPO prices significantly on the downside as supply has also remained low.

Stocks may fall to 1.75m mt in Jun-2013. We believe the Jun-13 total demand of 1.52m mt should continue to stay ahead of the total supply of 1.45m mt, hence depleting inventory by another 0.07m mt. We think the total demand should stay strong at level similar to May as the demand from Northern Hemisphere should continue to be strong due to the warm weather there. On the supply side, we have assumed only a 1% increase MoM in production to 1.40m mt after incorporating the weak CPO production level seen in Sabah. Our assumption of flattish exports is quite conservative as Intertek data for the first 10 days of April CPO exports showed an increase of 10% MoM. Overall, we expect the CPO price uptrend to continue at least in the short term but prices may taper off when the high production season starts in 2H13.

La Nina coming back soon? The latest SOI Index has surged to +12.6 0 (as of 2 Jun) and this is higher than the La Nina threshold of +8.0. Note that SOI readings above +8.0 indicate La Nina weather conditions, which mean excessive rains in major palm oil-producing countries in Malaysia and Indonesia. According to the Australian Bureau Of Meteorology, the Southern Oscillation Index (SOI) has risen steeply over the last two weeks. It further stated that “while most models suggest that neutral conditions will continue in 2013, it remains possible that a La Niña event could develop later in the year”. We have not factored in a La Nina impact into our CPO price assumption. Note that La Nina is only official when it stays above +8.0 for an extended period (usually more than two months).

Our Target Prices may be increased (by less than 10%) as our 2014 CPO price assumption may be increased slightly. We are reviewing our CPO price assumption for 2014 as we are likely to reduce our inventory estimate resulting in likely upside for CPO prices. However, we believe that any increases should be less than RM150 based on our preliminary estimate. Our current call on the sector is NEUTRAL with our current Target Prices shown in Page 5. We will, however, be issuing new Target Prices in our Strategy Note next week.

Source: Kenanga