Malaysia’s palm oil stocks level of 1.93m mt in Jan-14 came in 2.5% below market expectation of 1.98m mt. We believe that consensus may have been too conservative on Malaysia exports which decline by only 10% MoM against expectation of a 12% fall. Overall, this is positive to CPO prices as it reflects higher demand against supply in Jan-2014.

We also expect better CPO prices emanating from Indonesia’s successful implementation of its biodiesel policy. Note that in Jan-2014 Malaysia palm oil import (POI) remained very low at 15,782 mt or 85% lower, YoY. We reckon that this is a sign that Indonesia has implemented its biodiesel plan very well premised on the six successive months of very low POI. As Indonesia is the world’s biggest palm oil producer, more usage locally should lead to less export from the country and hence lessen the export competition with Malaysia. In the long run, this is bullish to CPO prices.

Reiterate OVERWEIGHT on the sector with our current CY14 average CPO price forecast of RM2,800/mt unchanged. Our top picks are IOICORP (OP; TP:RM4.95) and TSH (OP; TP: RM3.38). We also have OUTPERFORM calls on SIME (TP: RM10.30), KLK (TP: RM26.10), PPB (TP: RM16.60), TAANN (TP: RM5.00) and CBIP (TP: RM3.60). Maintain MARKET PERFORM on FGVH (TP: RM4.75), IJMP (TP: RM3.62) and UMCCA (TP: RM7.50). Maintain UNDERPERFORM on GENP (TP: RM10.00) due to its excessive valuation which is higher than big cap planters.

First stocks level decline in seven months. Malaysia stocks level declined 3% MoM to 1.93m mt and this is 2.5% below market estimate of 1.98m mt but close to our estimate of 1.95m mt. We believe that consensus may have too conservative on Malaysia exports as the rate of export decline came in at only 10% MoM against expectation of 12% decline. Overall, this is positive to CPO prices as it reflects higher demand against supply in Jan-2014.

Seasonal decline in exports is not a worry. On the demand side, export is experiencing seasonal decline of 10% MoM to 1.37m mt as the Northern Hemisphere enters a very cold winter in Jan-2014. This has caused lower demand for palm oil especially in European Union (-16% MoM to 202k mt) and China (-15% MoM to 306k mt). Despite the decline, the data actually came in better than expected as we think market may have earlier estimated the decline to be more severe at 12%.

Sustainable demand from Indonesia biodiesel plan. Note that in Jan-2014, import of palm oil remained very low at 15,782 mt or 85% lower YoY. We reckon that this is a sign that Indonesia has implemented its biodiesel plan very well as we observed six successive months of very low Indonesian palm oil import into Malaysia. Higher local palm oil usage in Indonesia should curb its export and hence lessen the export competition with Malaysia. In the long run, this is positive to CPO prices which benefit both countries.

Expect Feb-14 inventory to decline by 3% to 1.88m mt. On the supply side, we have assumed a 6.0% decline MoM to 1.42m mt, in line with seasonal trend. On the demand side, exports should slip 5.3% MoM to 1.30m mt due to lack of major festivals in the near-term and persistent cold weather in the northern hemisphere. Note that palm oil tends to solidify in cold weather and hence is used less in cold temperature. Hence, the sustained decline in inventory should continue to support current CPO prices and further appreciation.

Top Picks are IOICORP and TSH. We believe IOICORP’s valuation should rerate higher post its demerger exercise with IOI Properties as it emerges as the biggest and most efficient integrated palm oil players. Note that IOICORP’s FFB yield at 24.46mt per ha is also the highest among big cap planters. As for mid cap Top Pick, we like TSH due to its high FFB growth. Recall that its 9M13 FFB output is already showing 34% growth YoY to 379,673 MT (strongest growth among its peers).

Source: Kenanga