Malaysia’s palm oil stocks level of 2.28m MT in Nov-14 is within expectation as it is close to consensus estimate of 2.29m MT. Overall, we think that the data is neutral to CPO prices as market participants have largely priced in the 5% inventory increase for Nov-14. On the demand side, export remains weak MoM (-6% MoM to 1.51m MT) as exports to both European Union (-19% to 207k MT) and United States (-40% to 43k MT) declined in line with lower climate temperature there. However, the good news is that export to China has recovered as it increased 45% MoM to 317k MT indicating that the impact from recent crackdown on the commodity financing trade in China should have ended. Looking ahead, Dec-2014 inventory should decline 4% to 2.26m MT as total demand of 1.74m MT should outpace total supply of 1.66m MT.

Excluding the MPOB data, we have turned less optimistic on CPO prices and hence are likely to cut our assumption for CPO price in 2015 (from RM2,500/MT currently) mainly due to lower Brent crude oil price assumption. We maintain our NEUTRAL view on the sector despite potential reduction in stocks’ Target Prices due to the high number of big cap planters and scarcity of Shariah-compliant stocks. We maintain our 2014 CPO price assumption at RM2,400/MT as it is close to YTD CPO spot price of RM2,432/MT. Our top pick is SIME (OP; TP: Under Review) as the market is now expecting its motor division IPO between July-2015 to Aug-2015. We believe that the catalyst for SIME would be the news-flow resulting from its auto division IPO and we take the view that this impact should surpass the corporate earnings’ impact. For other planters, we are likely to keep the recommendations but with lower Target Prices.

November 2014 stocks level of 2.28m MT is within expectation, close to both consensus (2.29m MT) and our estimate (2.26m MT). MoM, inventory rose 5% to 2.28m MT as total demand drop of 9% exceeded total supply decline of 6%. Key reason behind the 9% total demand drop is the weak export which has slipped 6% to 1.51m MT. However, seasonally lower CPO production in November (-8% to 1.75m MT) limit the inventory increase. Overall, we believe that the news is neutral to CPO price as we think production is likely to continue declining in December and this should provide some support to CPO price.

EU demand declined, but China demand improved. Export declined 6% MoM to 1.51m MT due to lower export to European Union (-19% to 207k MT) and United States (-40% to 43k MT) as the temperature starts to decline in these countries. Note that palm oil tends to solidify in cold weather and hence is used less in cold temperature. However, the good news is that export to China has recovered as it increased 45% MoM to 317k MT. We believe that should be taken positively by the market as the impact from recent crackdown on the commodity financing trade in China should have come to an end.

December 2014 inventory should decline 4% to 2.19m MT as total demand of 1.74m MT should outpace total supply of 1.66m MT. We have assumed 11% production decline MoM to 1.56m MT in line with seasonal pattern. On the demand side, we expect flattish growth (-2% to 1.48m MT) as better demand seen from China is very much neutralised by lower demand from the European Union as it is entering winter currently. Hence, we believe that CPO price should appreciate slightly in December in line with lower inventory although the gain is likely to be limited as the stocks level is still expected to remain above 2.0m MT.

2015 CPO price Pending Review with negative bias. In view of the recent decline in Brent crude oil price, we are likely to cut our CPO prices assumption for 2015 (from RM2,500/MT currently). However, we wish to highlight that the rate of price reduction will not be as severe as the recent Brent crude oil decline of 40%. Note that the demand from biodiesel segment contributed to about 10% of total demand for palm oil historically. We maintain our 2014 CPO price assumption at RM2,400/MT as it is close to YTD CPO spot price of RM2,432/MT.

Maintain NEUTRAL with SIME as our only top pick. We maintain our NEUTRAL view on the sector despite potential reduction in Target Prices due to the high number of big cap planters and scarcity of Shariah-compliant stocks. Our top pick is SIME as the market is now expecting its motor division IPO between July-2015 to Aug-2015. We believe that the share price driver for SIME would be the news-flow resulting from its auto division IPO and take the view that this impact should surpass the corporate earnings’ impact.

Source: Kenanga