Malaysia’s palm oil stocks level of 1.84m MT in May-14 is within expectation as compared to consensus estimate of 1.83m MT. Overall, total supply (production + import) of 1.71m MT exceeded total demand of 1.63m MT which caused inventory to increase by 4% or 0.07m mt to 1.84m mt in May-2014. Looking ahead, we expect Jun-14 inventory to increase by 5% to 1.93m MT but CPO price downside should be limited. Overall, we maintain our positive view on CPO prices in the mid-to-long-term horizon due to sustainable demand seen from the food sector. Additionally, El Nino could start as soon as two months from now. Lastly, we expect the better CPO prices (+12% YoY to RM2611/mt) and better CPO production (+17% YoY) in 2Q14 to translate into earnings growth of 20% YoY for planters. We reiterate OVERWEIGHT on the sector with our current CY14 average CPO price forecasts of RM2,800/MT unchanged. Our top picks are IOICORP (OP; TP: RM5.40) and TSH (OP; TP: RM4.10). Other OUTPERFORMs include KLK (TP: RM27.00), TAANN (TP: RM5.00) and CBIP (TP: RM4.80). Maintain MARKET PERFORM on SIME (TP: RM10.00), PPB (TP: RM16.55), FGV (TP: RM4.75), IJMP (TP: RM3.80) and UMCCA (TP: RM7.50). Maintain UNDERPERFORM on GENP (TP: RM10.85) due to its excessive valuation which is even higher than big cap planters.
May stocks level +4% MoM to 1.84m MT. This is within expectation as it is close to consensus estimate of 1.83m MT and our estimate of 1.85m MT. Overall, total supply (production + import) of 1.71m MT exceeded total demand of 1.63m MT and caused inventory to increase by 4% or 0.07m mt to 1.84m mt in May-2014.
Demand for palm oil improved as exports increased 11% MoM to 1.40m MT on the back of robust export growth seen in India (+60% to 258k mt), European Union (+64% to 220k mt) and Pakistan (+14% to 75k mt). Demand from India and Pakistan should be due to stocking up activities ahead of Muslim fasting month expected to begin end-Jun. The European Union market may have used more palm oil for food and industrial as the weather gets warmer there. Production increased by 7% MoM to 1.66m mt in line with seasonal production pattern seen in the past. As expected, production uptrend continued in May-2014 for the 3rd consecutive months as production increased by 20% YoY to 1.66m mt.
Expect Jun-14 inventory to increase by 5% to 1.93m mt. We believe Jun-14 total supply of 1.72m MT should outpace total demand of 1.63m mt. We have assumed 1% production growth MoM in line with the seasonal pattern. On the demand side, we expect flat export growth as the completion of restocking activity for Ramadan may cause a temporary slowdown in demand from India and Pakistan. However, this is neutralised by better demand seen from the Northern Hemisphere (China and Europe) due to warmer weather there. Despite the higher inventory expected, the downside in CPO prices should be limited to RM2300/MT as this is the level of which we expect biodiesel producers in Indonesia to be profitable, which will spur discretionary demand.
Bracing for El Nino in 2H14. We gather that El Nino may occur as soon as 2 months from now. While near-term dry weather concern is no longer in the picture after rains arrive in 2nd half of March, we believe that the market will take the El Nino warning from scientists seriously and this should be supportive to CPO prices. Additionally, our model shows that CPO prices could surge above RM3000/MT in 2015 assuming a 5% drop in Malaysia CPO production. While El Nino could happen as early as 2H14, the impact on prices may not happen immediately as the lower production impact usually will take at least 4 months.
2Q14 earnings to benefit from 12% gains in CPO prices YoY and 17% production increase YoY. We gather that average CPO prices in 2Q14 so far is RM2611/MT, which is 12% higher YoY against 2Q13’s average of RM2324/MT. As for CPO production, it is growing significantly YoY as Malaysia CPO production grew by 17% YoY to 3.21m MT in the period of April and May. In view of higher CPO prices and higher CPO production, we believe that planters’ 2Q14 earnings are likely to be robust YoY with earnings growth of at least 20% seen for planters.
IOICORP (TP: RM5.40) and TSH (TP: RM4.10) are our TOP PICKS. We believe IOICORP’s upstream plantation should generate better earnings in FY15 due to better CPO prices YoY. Additionally, its downstream division is benefiting from economic recovery in Europe and US due to its expertise in oleochemicals and specialty oils. We continue to like TSH due to the young age profile of its plantation of about 6.5 years and superior FFB growth of 18% in FY14E (against peers’ average of 10%). Recall that its 1Q14 FFB output growth of 22% YoY to 156,742 MT is the strongest among planters under our coverage.
Inventory level of 1.84m mt is within expectation
Malaysia stocks level inched up 4% MoM and 1% YoY to 1.84m mt in May-2014. This is within expectation as it is close to consensus estimate of 1.83m MT and our estimate of 1.85m MT. Overall, total supply (production + import) of 1.71m MT exceeded total demand of 1.63m MT which caused inventory to increase by 4% or 0.07m mt to 1.84m mt in May-2014. Demand for palm oil improved as exports increased 11% MoM to 1.40m MT on the back of robust export growth seen in India (+60% to 258k mt), European Union (+64% to 220k mt) and Pakistan (+14% to 75k mt). Demand from India and Pakistan should be due to stocking up activities ahead of Muslim fasting month which should begin end-Jun. The European Union may have used more palm oil for food and industrial purpose as the weather gets warmer there. On the supply side, production increased by 7% MoM to 1.66m mt in line with seasonal production pattern seen in the past. As expected, production uptrend continued in May-2014 for the 3rd month as production increased by 20% YoY to 1.66m mt. Note that we have defined any output growth above 5% YoY as an uptrend and anything below 5% YoY as tree stress.
Looking ahead, we expect Jun-14 inventory to increase by 5% to 1.93m MT. We believe Jun-14 total supply of 1.72m mt should outpace total demand of 1.63m mt. We have assumed 1% production growth MoM in line with seasonal pattern. On the demand side, we expect flat export growth as the end of restocking activity for Ramadan period may cause temporary demand slowdown from India and Pakistan. However, this is neutralised by better demand seen from Northern Hemisphere (China and Europe) due to warmer weather there. Despite the higher inventory expected, the downside in CPO prices should be limited to RM2300/MT as this is the profitable level for local biodiesel producer in Indonesia.
Source: Kenanga