We remain NEUTRAL on the plantation sector, but are selectively Overweight on Singapore. Malaysia’s stock of palm oil shrank to 2.173m tonnes and should decline further over the next 1-2 months as the inventory downcycle is not over yet. This should boost palm oil prices in the immediate term.

Production starting to rise. Malaysia’s March palm oil production came in at 1.325m tonnes (+2.2% m-o-m), suggesting that the seasonal downcycle has ended and production should start to pick up.

March shipments strong. March palm oil exports were strong, rising 10.0% m-o-m to 1.539m tonnes and exceeding production by 0.214m tonnes. Meanwhile, oleochemical shipments surged by 30.3% m-o-m, an indication that Malaysia’s downstream competitiveness against Indonesia has strengthened. Biodiesel shipments, meanwhile, doubled to 14.6k tonnes. While the volume was small, it reflects the economic viability of biodiesel given CPO’s discount to Brent crude and the reintroduction of a tax credit for US biofuel.

Inventory level eases. Malaysia’s palm oil inventory declined by an encouraging 0.265m tonnes or 10.9% m-o-m to 2.173m tonnes. We mentioned in our 6 March report that inventory should drop to 1.8m–2.2m tonnes by May/June. We think there is a chance that inventory may fall briefly below the 2.0m-tonne level.

Refined palm oil inventory normalises. We find it encouraging that refined palm oil inventory has fallen to just 0.924m tonnes, down 5.4% from March 2012 levels. CPO inventory of 1.248m tonnes, while up 27.5% y-o-y, has fallen by 25.1% from its peak of 1.667m tonnes in Nov 2012. Note that the build-up in Malaysia’s palm oil stockpile last year was mainly in the form of CPO, hence the easing of CPO inventory is encouraging.

Near-term CPO price upside. As mentioned in our 2Q strategy, there is a small window for CPO prices to strengthen toward May/June, driven by the seasonal inventory downcycle. Some panic buying in the physical market could not be ruled out should the inventory fall below 2m tonnes. We believe that price visibility in 2H remains poor, as production will likely be strong in the absence of adverse weather conditions. Any decline in stockpile below the 2mtonne level will likely be short-lived.

Maintain NEUTRAL on sector. We are NEUTRAL on the broad plantation sector, with a selective Overweight on Singapore plantation equities based on valuation grounds. Our key Buy ideas are First Resources (FV SGD2.36), Sarawak Oil Palms (FV MYR6.77), AALI (FV IDR20,433) and Golden Agri (FV SGD0.71). Investors should also consider Sime (FV MYR10.20), which is an FBM KLCI index laggard that is likely to benefit when the Malaysian market starts to catch up with its regional peers.

Source: RHB