Plantation Sector Report From HWangDBS

Weaker August exports.
August palm oil production in Malaysia changed little m-o-m (+0.2%) at 1.495m MT, as Sabah’s yield recovery remained weak. Exports to China and India also declined m-o-m; we believe purchases for October festivities have started to wind down. At end of August, palm oil inventory had risen by 83k MT to 1.415m MT, representing an stock/usage ratio of c.7.7% from c.7.2% in July. An expected rise in September production and flat exports may further increase palm oil stock next month.

Short-term negative bias may reverse in 4QCY09.
While palm oil prices may continue its negative bias in the near term, prospects of lower Malaysian palm oil supply q-o-q and lower Indian and Chinese soybean yields in 4QCY09 may offset record US soybean harvests this year (on oil-content basis). Hence, we are positive on CPO price direction in 4QCY09.
Selective stance still maintained.
Most plantation stocks under our coverage already reflect stronger CPO price expectations next quarter (note our average CPO price forecast of RM2,300 this year vs. YTD price of RM2,256), as their share prices did not move in tandem with CPO prices’ recent correction. Hence, we believe it is imperative to remain selective. Our top picks are based more on valuation of long-term prospects than on CPO price movements. We believe Wilmar and Kencana Agri are still undervalued; and expect them to sustain a decent 7.2% and 29.6% growth in CY10F earnings, respectively

Malaysian palm oil production forecast cut.
Palm oil production volume in the first two months of 3QCY09 amounted to 2.987m MT. This means September production would need to reach 1.966m MT in a typical peak q-o-q increase of 20%. Given August data, this seems unlikely to be met this year. As it is equally unlikely for 4QCY09 production to increase q-o-q, we have hence cut Malaysian palm oil production forecast to 17.6m MT for this year from 18.1m MT. For now, we are maintaining Indonesian palm oil
production at 20.8m MT and CY09F -10F prices at RM2,300/MT.

Report From HWangDBS