Monday, July 11, 2011

Crude Palm Oil Inventory Growth Slows

Highlights
# Inventory registered a mom increase of 6.8% (yoy: +41.5%) to 2.05m tonnes in Jun 11, highest since Dec 09 as production growth (mom: +0.7%; yoy: +23.5%) and lower domestic consumption (mom: -25.5%; yoy: -11.8%) were more than offset a 12.4% mom (yoy: +9.5%) increase in exports.

# We are keeping our average CPO price assumption of RM3,200/tonne for 2011 as we believe the high inventory level would have already been priced-in and near-term CPO price will likely be cushioned by:
(1) Favourable near-term demand outlook in several major CPO consumers on the back of seasonal factors;
(2) The wide price gap between CPO and soybean oil;
(3) Production setback in Indonesia; and
(4) Unfavourable weather outlook that may disrupt supply of other competitive crops such as soybean and corn.

# Beyond 2011, we believe CPO price will likely to trend down from current level to an average of RM3,000/tonne on the back of the lack of fresh positive catalyst that will push CPO prices higher.

# We lowered our net profit forecasts and Target Prices for the 5 plantation stocks under our coverage, to reflect the lower average CPO price assumption beyond 2011.

Catalysts
# High CPO price to sustain into 2011.
# Positive correlation between CPO price and P/E.

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 - NEUTRAL
Positives
– Near-term outlook remains bullish.

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: RM10.44 based on SOP); and
# Tradewinds Plantation (BUY, TP: RM4.26 based on 12x FY12/11 FD EPS of 35.5 sen).

(i) FBM KLCI Vs Plantations Index. (ii) CPO Price - Spot Price. (iii) CPO Price - 3-month Future.
CPO 12-07-2011


Source: HLIB Research

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