Malaysia’s palm oil stocks level of 1.77m mt in Apr-14 is within expectations as it is only 1.7% higher than consensus estimate of 1.74m mt and 1.1% above our estimate of 1.75m mt. Demand for palm oil improved as exports increased 1% MoM to 1.26m mt. However, production grew more by 4% MoM to 1.56m mt, in line with the past historical seasonal production patterns.
Looking ahead, we expect May-14 inventory to increase by 5% to 1.85m mt but CPO prices downside should be limited. Overall, we maintain our positive view on CPO prices in the mid to long term due to sustainable demand from food-based demand. Lastly, we expect the better CPO prices (+15% YoY to RM2693/mt) in 1Q14 to translate into earnings growth of c.20% YoY for planters.
Reiterate OVERWEIGHT on the sector with our current CY14 average CPO price forecasts of RM2,800/mt unchanged. Our top picks are TSH (OP; TP: RM4.10) and SIME (TP: RM10.00). We also have OUTPERFORM calls on IOICORP (OP; TP: RM5.15), KLK (TP: RM26.10), IJMP (TP: RM3.80), TAANN (TP: RM5.00) and CBIP (TP: RM4.80). Maintain MARKET PERFORM on PPB (TP: RM16.55), FGVH (TP: RM4.75), GENP (TP: RM10.85) and UMCCA (TP: RM7.50).
April stocks level up 5% MoM to 1.77m mt and this is within expectation. However, it is still lower YoY by 8%. We deem the number as within expectation as it is only 1.7% higher than consensus estimate of 1.74m mt and 1.1% above our estimate of 1.75m mt. Overall, production growth of 4% MoM exceeded demand growth of 1% MoM, which caused inventory to increase by 5% or 0.08m mt to 1.77m mt in April-2014.
Demand for palm oil improved as exports increased 1% MoM to 1.26m mt on the back of healthy export growth seen in China (+36% to 253k mt), India (+17% to 153k mt) and Pakistan (+51% to 66k mt). Demand from China should result from warmer weather in April (against March). Note that palm oil tends to solidify in cold weather and hence is used more during warm temperature. As for India and Pakistan, we believe that these countries are stocking up palm oil to prepare for higher anticipated demand during the Muslim fasting months, which should begin end-Jun. Production increased by 4% MoM to 1.56m mt in line with the seasonal production patterns seen in the past. As expected, production uptrend continued in Apr-2014 for the 2nd month as production increased by 14% YoY to 1.56m mt.
Expect May-14 inventory to increase by 5% to 1.85m mt. On the demand side, we expect 10% export growth due to demand improvement resulting from warmer weather in Northern Hemisphere as well as stocking up demand from India and Pakistan. Note that our export growth estimate of 10% MoM is conservative as cargo surveyors reported that palm oil export has grown by 28% MoM to 391,856 mt in first 10 days of the month. As for the supply side, we expect 8% growth in production in line with the seasonal patterns. Despite the higher inventory expected, the downside in CPO prices should be limited as prices below RM2600/MT should spur discretionary demand from local biodiesel producer in Indonesia to secure additional supply to fulfil the high biodiesel mandate.
1Q14 earnings to benefit from 15% gain in CPO prices YoY. We gather that average CPO prices in 1Q14 was RM2693/MT which is 16% higher YoY or 7% higher QoQ. As for CPO production, it is flattish as Malaysia’s CPO production grew by 1% YoY to 4.28m MT in 1Q14. As CPO price is usually the key earnings driver for planters, we believe that 1Q14 is likely to be a good quarter with earnings growth of at least 20% YoY seen for planters.
We like TSH and SIME. Our overall top pick for the sector is TSH (OP; TP: RM4.10) as it stands to benefit more 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 is the strongest among planters under our coverage. For big caps, we like SIME (OP; TP: RM10.00) due to its attractive valuations among the big caps. Note that SIME’s Fwd. PE at 16.3x currently is lower against other big caps planters such as FGV’s 17.9x, KLK’s 20.2x and IOICORP’s 20.7x.
Source: Kenanga