Tuesday, May 10, 2011

Palm Oil Stock Increases On Higher Output

Highlights
# Apr 11 CPO production rose for the third consecutive month, with mom and yoy growth of 8.0% and 17.1% respectively to 1.61m tonnes (see Figure 1), due largely to recovering yield arising from the weakening signs of La Nina effect.

# Exports rose by 7.8% (mom) and 2.8% (yoy) to 1.33m tonnes in Apr 11, due mainly to higher exports to the US, India, and Nigeria (see Figure 3).

# Despite the strong CPO production growth, inventory rose by a much smaller quantum (+3.5% mom and +3.0% yoy) thanks to higher off take as well as lower imports.

# Average CPO spot price in Apr 11 fell by 2.2% mom to RM3,421/tonne from RM3,498/tonne in Mar 11. While we believe that CPO prices will likely to remain volatile (on the back of geopolitical uncertainties and improving palm oil output), we believe CPO price will likely stay above RM3,200/tonne in the near term, as:

(1) Erratic weather condition since last year may still have lingering effect on CPO output in the coming months;
(2) Demand from China has picked up since Apr 11; and
(3) Soybean oil’s premium over CPO remains high despite the recent price correction (see Figure 1: Price Gap between Soybean Oil & CPO), suggesting that there is still room for CPO price to advance. Hence, we are maintaining our average CPO price assumption of RM3,200/tonne for 2011.

Catalysts
# High CPO price to sustain into 2011.

# Positive correlation between CPO price and P/E. However, P/E is currently lagging behind CPO price.

# Adverse weather condition extending beyond 1Q 2011 that leads to lower-than-expected CPO output, hence brings up prices of CPO further.

Risks
# Global vegetable oil (including CPO) production comes in higher than expected, which will result in lower-than-expected CPO prices.

# Demand rationing by certain oil consuming countries (such as India) when vegetable oil price skyrockets to certain level, which would in turn bring down vegetable oil consumption.

Rating - OVERWEIGHT
Positives
# Strong earnings outlook, given our bullish view on CPO prices and demand.

Negatives
# CPO is part of the commodities market, whereby price is subject to speculation and over-reaction by financial market.

Top Picks

# Sime Darby (BUY, TP: RM10.76 based on SOP); and
# Tradewinds Plantation (BUY, TP: RM4.67 based o 12x FY12/11 FD EPS of 38.9 sen).

(i) FBM KLCI Vs Plantations Index. (ii) CPO Price - Spot Price. (iii) CPO Price - 3-month Future.
CPO 11-05-2011

Figure 1: Price Gap between Soybean Oil & CPO.
CPO 11-05-2011a


Source: HLIB Research

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