Malaysia’s palm oil inventory level of 1.67m mt for Aug-13 came in 4% lower than market expectation of 1.74m mt. Palm oil production growth came in weaker-thanexpected at only 4% MoM to 1.74m mt (against our estimate of 7% MoM to 1.79m mt). We may have underestimated the impact of harvester taking leave during Hari Raya in August. Exports registered healthy growth of 7% MoM to 1.52m mt due to better demand seen in China and Europe. Overall, we reckon the news is positive to CPO prices as the good demand growth MoM so far has been able to absorb the additional supply.

One key surprise seen is that Malaysia palm oil import has tumbled to a 5.5-year low of only 7,533 mt (87% below the 58,900 mt average monthly level in 2012). This could be a sign that Indonesia biodiesel implementation has been swift and could potentially lead to higher local palm oil consumption in Indonesia and limiting its export globally. 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 the 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 RM2,400/mt-RM2,700/mt unchanged. Our OUTPERFORM calls are reserved for PPB (TP: RM15.20) and TSH (OP: TP: RM2.60). However, we downgrade GENP to MARKET PERFORM with unchanged TP of RM9.35 as its recent share price increase is deemed to have factored in the long-term benefit from its proposed corporate exercise. Maintain MARKET PERFORM on SIME (TP: RM9.80), IJMP (TP: RM3.00), IOICORP (TP: RM5.40), KLK (TP: RM21.50), FGVH (TP: RM4.45) and UMCCA (TP: RM7.55). Maintain UNDERPERFORM on TAANN (TP: RM3.55) due to its high cost issue.

Inventory level is below market expectation. Malaysia’s August-2013 stocks level was flat MoM at 1.67m mt and this is below market estimate of 1.74m mt and our expectation of 1.75m mt. Palm oil production growth came in weaker-than-expected at only 4% MoM to 1.74m mt (against our estimate of 7% MoM to 1.79m mt). We may have underestimated the impact of harvesters taking leave during the Hari Raya festivities in August.

Exports registered healthy growth of 7% MoM to 1.52m mt due to better demand seen in China (+10% MoM to 335k mt) and Europe (+49% MoM to 226k mt). We believe China demand may be caused by the stocking up activity ahead of the Moon Cake Festival in mid-Sep. For the European market, we think the better demand may have been caused by weaker Ringgit which has made palm oil more competitive against rapeseed oil and soybean oil. Overall, we believe that the news is positive to CPO prices as the healthy demand growth MoM has so far been able to absorb the additional supply. Note that in the first 10 days of Sep-2013, palm oil exports has grown 11% MoM according to cargo surveyor data.

Indonesia local biodiesel demand may have surged and caused Malaysia palm oil import to tumble to a 5.5-year low. This is a 85% MoM decline in August-2013 to only 7,533 mt and also 87% below the 58,900 mt average monthly level in 2012. If the data stays below 10,000 mt for an extended period, it should be positive to CPO prices as this is a strong indication that Indonesia biodiesel implementation has been swift. This should lead to higher local palm oil consumption in Indonesia and hence limiting its export outside Indonesia.

Looking ahead, we expect Aug-13 inventory to increase by 5% MoM to 1.75m mt. On the supply side, we have assumed 6% increase MoM to 1.84m mt in line with seasonal trend. On the demand side, exports should grow 3% MoM as we expect stock-up activity in China ahead of the Moon Cake Festival which falls on 19 Sep. We do not think that the 5% increase in inventory is a major concern as CPO prices should be supported by strong crude oil prices and a weak Ringgit.

Prefer PPB for big caps and TSH for mid-caps. Against other big cap planters, PPB’s 2Q13 earnings growth of 61% to RM174m stood out as the strongest for the last earnings season. This trend should continue at least for 3Q13 in view of the good margin seen so far for Wilmar’s palm oil downstream division. We also like TSH due to its strong earnings growth despite low CPO prices as its earnings is supported by a young tree age profile for its plantation which translate into high FFB volume growth. However, we downgrade GENP to MARKET PERFORM as its recent share price increase should have priced in the long-term benefit from its proposed corporate exercise.

Source: Kenanga