Maintain neutral: Lower crude palm oil (CPO) inventory in August this year, the large price discount between CPO and soyoil/rapeseed oil of US$280 (RM854) to US$300 per tonne, and relatively softer soyabean prospects in the US and parts of South America will help support CPO price above RM3,000 per tonne in the short term. We expect short-term CPO price volatility to continue and maintain “neutral” on the sector. Our top “buys” are Sarawak Oil Palms Bhd (SOP) and TSH Resources Bhd which provide good long-term value and growth propositions with strong 16% and 20% three-year forward production compound annual growth rate respectively. SOP also trades at a single-digit price-earnings ratio of eight times 2012 PER.
Malaysia’s CPO production fell to 1.667 million tonnes (-4.8% month-on-month [m-o-m]) in August as work hours were shorter during the fasting month and workers went on holiday ahead of Hari Raya Aidilfitri. Lower m-o-m production was partially mitigated by weaker m-o-m exports of 1.689 million tonnes (-2.7% m-o-m, +39.4% year-on-year) and weaker m-o-m domestic consumption of 0.164 million tonnes (-10.1% m-o-m, -8.7% y-o-y). This resulted in lower August month-end stock of 1.885 million tonnes (-5.6% m-o-m, +10.2% y-o-y); in line with our expectations. Weaker m-o-m exports were mainly due to lower demand from China (0.39 million tonnes; -15% m-o-m, +204% y-o-y), and other non-core export markets (collectively 0.62 million tonnes; -13% m-o-m, +4% y-o-y). Exports to the European Union, the US, India and Pakistan registered higher m-o-m and y-o-y figures.
Early data point to the likelihood of an increase in inventory for September, with weaker m-o-m export estimates for Sept 1 to 10 of 389,069 tonnes (-36% m-o-m) and 337,038 tonnes (-36% m-o-m) by independent cargo surveyors Societe Generale de Surveillance and Intertek. Exports were likely impacted by the week-long Hari Raya and Independence Day celebrations in Malaysia. While we anticipate exports to pick up for Sept 11 to 20, the overall export figure for the month of September is likely to be weaker m-o-m. Demand may however receive a boost from CPO’s widening price discount to soyoil and rapeseed oil.
We maintain our RM3,200 per tonne average CPO price forecast for 2011 (year-to-date: RM3,390 per tonne) and RM3,000 per tonne for 2012 as we had expected prices to be lower in 2H11 on strong production recovery. The recent steep share price correction (-10% since August this year) presents investors with a good entry level into large-cap IOI Corp Bhd (“buy”). We also advocate “buy” on mid-caps, TSH and SOP, for their long-term value and growth propositions. — Maybank IB Research
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