Malaysia’s Dec-14 palm oil stocks of 2.01m MT came in within expectations, spot-on with consensus estimate (2.02m MT) but 8% below our estimate (2.19m MT) primarily due to the heavy flooding in the East Coast which resulted in lower-than-expected production. We think the lower production is likely to persist into Jan-15, in line with historical trends. Exports are likely to decline too, as we think the higher Dec-14 export to India is a one-off “stocking-up” event prior to import duties being imposed. Hence, we estimate that Jan-15 closing inventory will decline another 12% to 1.77m MT. Despite lower-than-expected year-end closing stocks, we maintain our FY15E CPO price at RM2,200/MT due to the minimal impact on our planters’ earnings estimates. We remain neutral on CPO price outlook which we believe should weaken in 2H15 on peak production season (from April onwards), compounded by weak oil prices and MYR. However, we maintain our NEUTRAL view on the sector due to the high number of big-cap planters and scarcity of Shariah-compliant stocks. Our top pick is SIME (OP; TP: RM9.92) as the market is now expecting its motor division’s IPO between July-2015 to Aug-2015. We believe that the catalyst for SIME would be news-flow resulting from its auto division IPO. We take the view that this IPO impact would surpass the corporate earnings’ impact. Maintain MARKET PERFORM on KLK (TP: RM21.50), PPB (TP: RM15.26), FGV (TP: RM2.30), IJMP (TP: RM3.30), TSH (TP: RM2.18), TAANN (TP: RM3.70), UMCCA (TP: RM6.68), and CBIP (TP: RM2.05); and maintain UNDERPERFORM on IOICORP (TP: RM4.40) and GENP (TP: RM9.20).

Dec-14 stocks level of 2.01m MT is within market but below our expectations. Year-end stock level came in close to consensus expectations (2.02m MT) but was 8% below our estimate (2.19 MT). MoM inventory declined 12% to 2.01m MT due to lower production which fell 22% MoM to 1.36m MT, which is a significantly greater drop than our original -11% production drop estimate. This was due to the recent heavy floods in the East Coast of Peninsular Malaysia, which disrupted harvesting and transportation of FFB in the area.

Lower production trend to continue into Jan-15? Dec-14 production in Peninsular Malaysia fell 30% to 609k MT while production in Sabah and Sarawak fell 14% to 756k MT. We think that the lower production trend could persist into Jan-15 as production between Dec-Feb tends to be lower due to seasonal fluctuations. Note that January MoM production has seen a decline every year in the last 5 years, ranging between -10% to -14%. This seasonality factor applies to both Peninsular Malaysia (-7 to -14%) and East Malaysia (-11% to -17%). Hence, we estimate that Jan-15 production is likely to weaken further by 12% to 1.20m MT.

India’s rise in demand offsets China weak consumption but we expect this to be temporary. Total exports were flat MoM at 1.52m MT (from 1.51m MT in Nov-14). MoM, lower demand from China (-24% MoM to 257k MT) was offset by higher demand from India (+27% to 364k MT). The demand increase from India was most likely a one-off event due to the expected increase of import duties in India with effect from Dec-24. We believe this has led to a one-off spike in demand due to stocking up activities. Going forward, we think imports from India may slow down temporarily as the new import duties come into effect.

Jan-15 inventory could decline another 12% to 1.77m MT. Total demand of 1.54m MT should exceed total supply of 1.29m MT. On the supply side, we assume production to continue declining by 12% to 1.23m MT, in line with seasonal trends as highlighted above. On the demand side, we think exports could slip 12% to 1.34m MT due to the abovementioned slower exports to India. We also think that exports to the European Union and the United States could see a decline due to colder weather in the Northern Hemisphere. Note that palm oil tends to solidify in lower temperatures and hence used less in colder climates.

Maintain FY15E CPO price estimate at RM2,200/MT. Despite the lower-than-expected FY14 closing stocks, we maintain our FY15E CPO price estimate at RM2,200/MT; our updated model generated a revised CPO price estimate of RM2,246/MT or 2% higher than our assumptions, which will not cause significant changes to our planters’ earnings estimates. We think that the low inventory environment, which has contributed to CPO prices rising by 11% to RM2,341/MT from December lows of RM2,101/MT, will be supportive to CPO prices in the short-term. However, we remain neutral on CPO prices over CY15 despite lower inventory levels as we think CPO prices should weaken in 2H15 when peak production kicks in from April, compounded by the weak crude oil prices and MYR.

Maintain NEUTRAL on Plantation with SIME (OP, TP: RM9.92) as our Top Pick. Although CPO is expected to weaken in 2H15, we maintain our NEUTRAL view on the sector 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’s 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’s IPO and take the view that this impact would surpass the corporate earnings’ impact.

Source: Kenanga