Favourable analyst reports from JP Morgan & TA Securities.
Plantation Sector
A Milder Stocks Build up
Overweight
TA Securities, 11 Sep 2013
An Orderly Stocks Build Up The drastic increase in stocks in the Sept/Nov period last year will likely to be absent this year. All in, we estimate stocks could increase to 1.78mn – 1.80mn tonnes at the end of Sept this year (Sept 2012: 2.48mn tonnes), barring any export shock. This factor is supportive of our 4QCY13 average CPO price estimate of RM2,500/tonne. As for stocks pick, we like Sime Darby and Boustead.
Wilmar too appears attractive underpinned by sustained recovery in the
Oilseeds & Grains segment and earnings accretion from the aggressive expansion in sugar and flour in the past two years.
IFAR’s share price hasdeclined as much as 21% in the past three months, which we think is related to the devaluation of Rupiah. The stock is now trading at 8.7x forward PER, close to the historical low of 8.3x.
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ASEAN Agri-Commodities
August palm oil inventory continued to stay low -ALERT
JP Morgan, 10 Sep 2013
Malaysia August palm oil inventory stayed low at 1.67 million MT: MPOB just released August palm oil inventory at 1.67 million MT (flat M/M), against Street estimate of 1.71 million MT and an earlier survey figure of 1.73 million MT reported by Reuters last week.
Stock-to-export ratio fell to a low of 1.1x (historical mean: 1.3x), a level last seen in June 2012 before inventory started to rise significantly that caused the CPO price correction in 4Q2012. This is despite having entered the seasonally higher production period in the year where production rose further in August.
We believe this inventory print will continue to be positive in supporting CPO price, with added strength from the roll-out of B10 biodiesel in Indonesia adding to demand.
Production picked up in line with seasonality but further normalization underway: Production rose a further 3.6% M/M (+4.3% Y/Y) to 1.74 million MT, in line with seasonality trends. This followed from an 18% M/M increase in July. YTD production growth continued to see a gradual normalization trend at +5.7% Y/Y. That inventory continued to maintain in a low, comfortable level was a strong reflection of the underlying demand as evident from both the exports and domestic consumption trend.
Exports rose 7.4%, domestic consumption also strong: Exports rose 7.4% M/M and 5.7% Y/Y, continuing the strength in July. YTD, exports were up 7.4%. Domestic consumption also stayed strong, up 25% Y/Y.
Macro datapoints also supportive of CPO price recovery: Soybean price saw a strong c.10% rally from its mid-Aug trough, triggered by dryness affecting major soybean producing regions in US Midwest.
Early signs of dryness in South America that could potentially impede soybean planting in Brazil this month have also raised some supply concerns further out. The recent B10 biodiesel push in Indonesia is also expected to drive near term CPO demand with current crude oil price making blending profitable even without subsidies. YTD CPO price is tracking our forecast and we maintain our 3Q/4Q13E forecast of M$2,350/M$2,400 and M$2,500 for 2014E.
JPM view – CPO price recovery underway, OW GGR, FR, BWPT, GENP, SIME:
Our thesis regarding a gradual recovery in CPO price in 2H2013 remains intact with potential upside risks if weather events were to disrupt the upcoming US or next year's South America's soybean crop.
Further strength in crude oil price may also encourage faster adoption of the B10 biodiesel programs in Indonesia and Malaysia. The sector is well positioned for a recovery, in our view. We therefore expect stocks that have underperformed but continued to deliver strong production growth or are expected to see meaningful earnings recovery in 2H13 to play catch-up. The near term biasness could therefore be tilted towards the Malaysian-listed names which have been the bigger underperformers across the region over the past 1 month.
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