Malaysia’s palm oil stocks level of 1.68m MT in July-14 is above expectation at 5% higher than consensus estimate of 1.60m MT. The higher-than-expected inventory is likely due to weaker-than-expected demand as exports declined 2% MoM to 1.45m MT. We believe that palm oil exports have been affected by China’s latest crackdown on the commodity financing trade as exports to China suffered a 29% drop MoM to 194k MT. Looking ahead, we expect Aug-14 inventory to increase 5% to 1.77m MT assuming 4% production growth MoM and flattish exports. Overall, we believe that the news is short-term bearish on CPO prices. However, the long-term CPO price uptrend is intact due to sustainable demand seen from the food sector. We reiterate our NEUTRAL call on the sector with both our CY14-CY15 average CPO price forecast of RM2,500/MT unchanged. As 2Q14 earnings are likely to meet consensus estimate, we believe that downside is limited. Our top picks are SIME (OP; TP: RM10.35) and TSH (OP; TP: RM4.00). Another OUTPERFORM is CBIP (TP: RM5.60). Maintain MARKET PERFORM on IOICORP (TP: RM5.30), KLK (TP: RM25.00), FGV (TP: RM4.40), PPB (TP: RM15.00), TAANN (TP: RM4.50), UMCCA (TP: RM7.50) and IJMP (TP: RM3.75). Maintain UNDERPERFORM on GENP (TP: RM9.70) due to its excessive valuation which is even higher than big cap planters.
July stock level of 1.68m MT is higher than expected being 5% above consensus estimate of 1.60m MT and 2% higher than our estimate of 1.65m MT. The higherthan-expected inventory is likely due to weaker-than-expected demand as exports declined 2% MoM to 1.45m MT. We believe that palm oil exports have been affected by China’s latest crackdown on the commodity financing trade as exports to China suffered a 29% drop MoM to 194k MT.
Demand for palm oil declined 2% MoM to 1.45m MT (against historical norm of flattish trend) as exports to China tumbled 29% MoM to 194k MT while export to European Union (EU) declined 10% to 203k MT. As mentioned previously, export to China may have been affected by the recent crackdown on the commodity financing trade. Meanwhile, EU may have used more local rapeseed oil as the production is at record high there. On the supply side, sign of tree stress is already showing as YoY production actually inched down 1%. However, ample production of competing soybean oil is limiting CPO prices’ upside.
Aug-14 inventory may increase 5% MoM to 1.77m mt. We believe Aug-14 total supply of 1.76m MT should outpace total demand of 1.67m MT. We have assumed 4% production growth MoM in line with seasonal pattern. On the demand side, we expect flattish export growth as better expected demand from Northern Hemisphere would be neutralized by the China crackdown on commodity financing trade. The expected higher inventory in Aug is likely to cap CPO prices’ upside.
2QCY14 results likely to meet consensus estimates. We believe that the upcoming result season in end-Aug should not see any significant negative surprise for the sector. This is because 1H14 CPO price of RM2633/MT is very close to consensus average CPO prices estimate of RM2650/MT. Additionally, we expect at least 20% earnings growth YoY for planters due to better CPO prices (+11% YoY) and higher CPO production (+15% YoY). As a result, we do not expect significant downside in planters’ share prices in the near-term.
Top picks are SIME and TSH. SIME (OP; TP: RM10.35) is our big cap top pick as we believe SIME’s valuation should rerate higher due to potential demerger exercise in the Group. TSH (OP; TP: RM4.00) is retained as our mid cap top pick due to its superior FFB growth of 18% in FY14E (against peers’ average of 10%). We also like CBIP (OP; TP: RM5.60) as it is poised to capture strong demand for palm oil mills in 2014 and also for its steady margin improvement historically.
Source: Kenanga
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