Malaysia’s palm oil inventory level of 1.66m mt for Jun-13 came in within market and our expectations of 1.65m mt. MoM, inventory inched up only 1% as demandsupply equation remained in equilibrium in July-2013. On the supply side, palm oil production grew by 18% MoM but down 1% YoY to 1.67m mt. MoM, exports were flat at 1.42m mt as higher export to China and India was neutralized by lower export to European Union and Pakistan. We view the  statistic as neutral to CPO prices as the total supply of 1.72m mt is well balanced by total demand of 1.71m mt. 

Looking ahead, we expect Aug-13 inventory to increase by 5% MoM to 1.75m mt. This should weaken CPO prices but not significantly due to demand support from strong crude oil prices and weak Ringgit.

Maintain NEUTRAL on the sector with our current CY13-CY14 average CPO price forecasts of RM2,500/mt-RM2,700/mt unchanged. We have OUTPERFORM calls on IJMP (TP: RM3.50) and TSH (TP: RM2.60) due to high  FFB growth potential. Maintain MARKET PERFORM on SIME (TP: RM9.80), IOICORP (TP: RM5.40), KLK (TP: RM21.86), PPB (TP: RM15.20), FGVH (TP: RM4.60), GENP (TP: RM9.85), and UMCCA (TP: RM7.55). Maintain UNDERPERFORM on TAANN (TP: RM3.55) due to its high cost issue.

Inventory level in line with market expectation. Malaysia stock level increased 1% MoM to 1.66m mt and this is within consensus and our estimate of 1.65m mt. Overall, we are neutral on the news as demand-supply equation remained in equilibrium in July-2013. Total supply (production + import) of 1.72m mt is well balanced by total demand (exports + local disappearance) of 1.71m mt. Despite the slight increase MoM, we wish to highlight that the inventory level is now 17% lower YoY as compared to 2.0m mt level last year. The stock-tousage ratio also declined MoM to 8.1% as total demand increased by 6% as compared to the 1% increase in inventory. 

Palm oil production grew by 18% MoM but down 1% YoY to 1.67m mt. This shows that palm trees are likely to be less productive in 2H13 as compared to 2H12 last year on lingering tree stress. Exports were flat MoM at 1.42m mt as higher export to China (+12% MoM to 304k mt) and India (+24% to 166k mt) was neutralised by lower export to European Union (-29% MoM to 144k mt) and Pakistan (-23% to 129k mt).

Looking ahead, we expect Aug-13 inventory to increase 5% MoM to 1.75m mt. We estimate Aug-13 total supply of 1.84m mt to exceed total demand of 1.75m mt which should increase inventory level by 0.09m mt. On the supply side, we have assumed 7% increase MoM to 1.79m mt in line with seasonal trend. On the demand side, exports should grow 9% MoM as we expect stock-up activity in China to pick up ahead of the Moon Cake Festival which falls on 19 Sep. Thus, CPO prices may weaken on higher inventory but not significantly due to demand support from strong crude oil prices and a weak Ringgit.

High palm oil production of 18% MoM but down 1% YoY to 1.67m mt. This marked the 2^nd consecutive YoY production decline after 9 months of consecutive production uptrend. Hence, we think that the market should not be overly concerned on the huge increase in MoM production. We also think the strong double digit production growth MoM will not continue in August as significant amount of harvesters may have halted operations during the Hari Raya season. Overall, subpar seasonal growth in palm oil production in 2H13 should provide support to CPO prices.

Top pick is IJMP.  We believe IJMP’s 2QCY13 earnings should outperform its peers due to superior FFB growth as its 2QCY13 FFB volume has grown by 39% YoY to 148,071 mt. In our view, IJMP 2QCY13 FFB growth is likely to be the highest among its peers. Besides IJMP, we also have OUTPERFORM calls on TSH (TP: RM2.57), also due to their strong FFB growth estimated at 30% YoY.

Source: Kenanga