Malaysia’s palm oil stocks level of 2.17m MT in Oct-14 is within expectations as it is close to consensus estimate of 2.16m MT. Overall, we think that the data is positive to CPO prices as we think that the market looks forward to trend of lower MoM production, which confirmed that peak production is now behind us in August. On the demand side, export is still flattish MoM (-1% MoM to 1.61m MT) as demand from India has softened after the Deepavali festival in October. However, the good news is that export to China has recovered as it increased 46% MoM to 240k MT indicating that the impact from a recent crackdown on commodity financing trade in China has come to an end. Looking ahead, Nov-2014 inventory may rise 4% to 2.26m MT but we believe that CPO price downside is limited as CPO production is likely to decline continuously MoM until March-2015. Despite our bullish view on CPO prices, we maintain our NEUTRAL call on the sector as the upcoming 3Q14 earnings season is likely to be weak for most planters. We also maintain our CY14-CY15 average CPO price forecasts of RM2,500/MT each. Our only top pick is SIME (OP; TP: RM10.10) due to potential spin off exercise within its business divisions. Maintain MARKET
PERFORM on IOICORP (TP: RM5.30), KLK (TP: RM23.80), FGV (TP: RM4.00), PPB (TP: RM15.00), TSH (RM2.27), IJMP (TP: RM3.50), TAANN (TP: RM4.55), UMCCA (TP: RM7.15). Maintain UNDERPERFORM on GENP (TP: RM9.55). In view of the recent 1:1 bonus issue which has gone ex, our new TP for CBIP is RM2.43 and we maintain our MARKET PERFORM call.
Oct stocks level of 2.17m MT is within expectations as it is close to consensus estimate of 2.16m MT. However, it is higher than our expectation of 2.04m MT as MoM production decline is only 0.2% against our expectation of a 4% drop. Although Oct production came in higher than expected, we are not overly concerned as we think that the market looks more into the trend of lower MoM production, which confirmed that peak production is now behind us in August. Hence, we believe that CPO prices should have bottomed as production continues its declining trend at least for the next three months.
India’s demand softened after Deepavali but China demand recovered. The slight decline in export by 1% MoM to 1.61m MT is caused by softening export to India (-40% to 264k MT) as demand returned to normal level after seasonal spike last month due to Deepavali festival. However, the good news is that export to China has recovered as it increased 46% MoM to 240k MT. We believe that this should be taken positively by the market as a sign that the recent crackdown on the commodity financing trade in China has come to the end.
Nov-2014 inventory may rise 4% to 2.26m MT as total supply of 1.80m MT should outpace total demand of 1.71m MT. We have assumed 6% production decline MoM to 1.78m MT in line with the seasonal pattern. On the demand side, we expect flattish growth at 1.44m MT as better demand seen from China is very much neutralised by normalising demand from India post Deepavali festival. Despite the expected higher inventory in November, we believe that its downside is limited as production is likely to decline continuously MoM until March-2015 and this should keep prices well supported.
However, near term prospect is not good as we expect weak 3QCY14 earnings for planters. The upcoming 3QCY14 results season in end-Nov is likely to show decline in earnings YoY for almost all plantation companies due to lower CPO prices YoY. Note that 3QCY14 CPO price of RM2,210/MT is lower by 5% against 3QCY13’s RM2,338/MT. On a QoQ basis, we think earnings are likely to be flattish as seasonal CPO production increase by around 17% QoQ, would likely be neutralised by lower CPO prices by 14% QoQ to RM2,210/MT (against 2Q14’s RM2,572/MT). In our view, lower earnings outlook should keep the upside limited for planters.
Maintain NEUTRAL with SIME (OP; TP: RM10.10) as our only top pick. We like SIME as we think its valuation should rerate higher due to potential spin off exercise within its business divisions. As it is, it has been reported by media quoting Tan Sri Mohd Bakke Salleh (SIME’s CEO) specifying that the listing of its motor unit is set to be executed in 1HCY15 subject to market conditions. The stock is also cum dividend of 30.0 sen (subject to approval in the AGM on 13-Nov-2014).
Source: Kenanga
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