Malaysia’s palm oil stocks level of 1.66m MT in Jun-14 is way below expectation being 11% below consensus estimate of 1.86m MT. Overall, total demand of 1.77m MT exceeded total supply (production + import) of 1.58m MT which caused inventory to plunge by 10% or 0.19m mt to 1.66m mt in Jun-2014. Looking ahead, we expect July-14 inventory to decline 8% to 1.53m MT or effectively making it the lowest in three years which is bullish for CPO prices. Lastly, our observation shows that tree stress period may have returned in July due to delayed impact from the drought in 1Q14. Overall, we maintain our positive view on CPO prices due to sustainable demand seen and potential supply curb caused by tree stress. On the recent Overnight Policy Rate increase by Bank Negara Malaysia, we believe that it is neutral to CPO prices as our economist maintains his forecast of USDMYR at average 3.25 for 2014. We reiterate OVERWEIGHT on the sector with our current CY14 average CPO price forecasts of RM2,800/MT unchanged. Our top picks are KLK (OP; TP: RM27.00) and TSH (OP; TP: RM4.10). Other OUTPERFORMs include SIME, (TP: RM10.50), IOICORP (TP: RM5.40), TAANN (TP: RM5.00), UMCCA (TP: RM7.65) and CBIP (TP: RM4.90). Maintain MARKET PERFORM on PPB (TP: RM16.55), FGV (TP: RM4.75) and IJMP (TP: RM3.80). Maintain UNDERPERFORM on GENP (TP: RM10.85) due to its excessive valuation which is even higher than big cap planters.
June stocks level of 1.66m MT is way below expectation as it is 11% below consensus estimate of 1.86m MT and 14% below our estimate of 1.93m MT. The surprisingly low inventory is a result of better-than-expected demand while production unexpectedly declined. Overall, total demand of 1.77m MT exceeded total supply of 1.58m MT which caused inventory to plunge by 10% or 0.19m MT to 1.66m MT in Jun-2014 (the lowest in 12-months’ time).
Demand for palm oil surged 5% MoM to 1.48m MT (against historical norm of flattish trend) as exports to China jumped 26% to 278k MT while US demand was up 28% to 83k MT. We believe that China and US may have used more palm oil for food and industry use as the weather gets warmer in the Northern Hemisphere and also due to higher discount of CPO against soybean oil (SBO). On the supply side, production unexpectedly declined 5% MoM to 1.57m MT (against historical norm of 1% increase). We believe that the hot and dry weather in the 1Q14 may have caused delayed effect on June production.
July-14 inventory may decline 8% to 1.53m mt or the lowest level in three years. We believe July-14 total demand of 1.80m mt should outpace total supply of 1.67m mt. We have assumed 5% production growth MoM in line with seasonal pattern. On the demand side, we expect 6% export growth as we foresee better demand from Northern Hemisphere (China, Europe and US) due to warmer weather there. We believe that the significant inventory drawdown expected in July-14 will cause CPO prices to appreciate considerably.
Tree stress may have started in July. Our observation shows that tree stress period may have returned in July as we expect production to decline 2% to 1.65m MT. This could be caused by the 4-6 months delayed impact of dry season experienced in 1Q14. Note that this should be the first YoY production decline in 5 months and we expect positive impact to CPO prices. Note that we have defined any output growth above 5% YoY as a production uptrend and anything below 5% YoY as tree stress.
Expect neutral impact from OPR increase by BNM. Yesterday, Bank Negara Malaysia (BNM) has decided to raise the Overnight Policy Rate (OPR) by 25 basis points to 3.25%. We expect this to have neutral impact on CPO prices as our economist has maintained his average USDMYR rate for 2014 at 3.25. This is due to his expectation that USD should strengthen on the expectation of interest rate increase in the United States possibly in 2015. Historically, weak Ringgit is positive to CPO prices as it makes CPO more competitive against soybean oil which is priced in USD.
KLK (TP: RM27.00) and TSH (TP: RM4.10) are our TOP PICKS. We like KLK due to its laggard status among big cap planters and expected robust earnings growth of 42% for FY14 of RM1.30b. Additionally, KLK is now the only big cap and non-GLC Malaysian listed planter which is expected to remain Shariah-compliant for the foreseeable future. TSH is retained as our Top Pick due to its trees’ young age profile 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.
Source: Kenanga