Malaysia’s palm oil stocks level of 1.66m mt in Feb-14 came in significantly below market expectation of 1.80m mt. We have underestimated the tree stress impact as production surprisingly plunged by 15% MoM (against our expectation of 6% MoM drop). On the demand side, exports remain strong and declined only 1% MoM to 1.35m mt despite the shorter February month. Overall, we are positive on the news as lowerthan-expected inventory is usually taken as bullish sign for CPO prices. Our Indonesian biodiesel usage tracker using MPOB palm oil imports (POI) continue to show a sign of sustainable demand as POI for Feb-2014 remained very low at 8,259 mt or 91% lower YoY. On the other hand, we expect Mar-14 inventory to decline by 8% to 1.52m mt and this should be supportive to CPO prices.
Reiterate OVERWEIGHT on the sector with our current CY14 average CPO price forecasts of RM2,800/mt unchanged. However, we are watching the current dry season closely and we wish to highlight that CPO prices should surge above RM3,000 and hit RM3,200 by end-June if the dry season extends beyond March. Our top picks are IOICORP (OP; TP: RM5.15) and TSH (OP; TP: RM4.10). We also have OUTPERFORM calls on SIME (TP: RM10.00), KLK (TP: RM26.10), PPB (TP: RM17.00), IJMP (TP: RM3.80), TAANN (TP: RM5.00) and CBIP (TP: RM4.05). Maintain MARKET PERFORM on FGVH (TP: RM4.75), GENP (TP: RM10.85) and UMCCA (TP: RM7.50).
February stocks level came in significantly below consensus estimate. Malaysia stocks level declined 14% MoM to 1.66m mt and this is 8% below consensus and our estimate of 1.80m mt. We have underestimated the tree stress impact as production plunged by 15% MoM (against our expectation of 6% MoM drop). On the demand side, exports remained strong and declined only 1% MoM to 1.35m mt despite the shorter month in February. Overall, we are positive on the news as lower-than-expected inventory is usually taken as a bullish sign for CPO prices.
Sustainable demand from Indonesian biodiesel plan. Note that in Feb-2014 import of palm oil remained very low at 8,259 mt or 91% lower YoY. We reckon that this is a sign that Indonesia has implemented its biodiesel plan successfully as we have noticed seven successive months of very low palm oil import. Higher palm oil usage in Indonesia should curb its export and hence lessen the export competition with Malaysia. In the long run, this is conducive to CPO prices, which benefit both countries.
Expect Mar-14 inventory to decline by 8% to 1.52m mt. On the supply side, we have assumed 14.0% increase MoM to 1.46m mt in line with seasonal trend. On the demand side, exports should improve 5% MoM to 1.42m mt as the weather in the northern hemisphere heats up from March onwards. Note that palm oil tends to solidify in cold weather and hence is used less during cold temperature. Local consumption should stay strong at 0.20m mt and this together with good export increase should cause inventory to decline further in March. This should be supportive to CPO prices, and we expect it to stay at the current strong level of around RM2,900.
Watch out for potential El Nino. In its latest forecast published on 6-Mar-2014, the US National Climate Prediction Centre (NCPE) mentioned “about a 50% chance of El Niño developing during the summer or fall (i.e. 21-Jun to 20-Dec)”. We are watching the current dry season closely and we wish to highlight that CPO prices should surge above RM3,000 to hit RM3200 by end-Jun if the dry season extends beyond March. This is due to our expectation that CPO production will come in much lower below current market expectation causing inventory to be depleted significantly to a 7-year low level of 1.25m mt by Jun-2014 if El Nino hits.
Top Picks are IOICORP and TSH. Among the big caps, we like IOICORP (OP; TP: RM5.15) as it is the most liquid and pure proxy among the big caps for CPO prices upside play. In the mid cap space, we like TSH (OP; TP: RM4.10) as it stands to benefit most from the recent CPO prices increase due to its high FFB growth. Recall that its FY13 FFB output growth of 28% YoY to 542,951 mt is the strongest among planters under our coverage.
Source: Kenanga