· Slower decreased (-5.4% mom) of April inventory to 1.29m MT. Inventory benefited from softer production growth (+0.8% mom) but we also note that both exports (-6.9% mom) and domestic disappearance (-5.8% mom) began to slide.
· Production to pick up. Though Apr 09 production only recovered by 0.8% mom, we believe production recovery would gain pace in 2H09. YoY April production is lowered by 3.1%, suggesting a mild yield stress. We were made to understand by industry players that production drops in Jan and Feb 09 were more related to rainy weathers with potential mild yield stress in play.
· Exports slipped 5.8% mom to 1.19m MT on the back of lower exports to China and EU countries. However, exports to India and Pakistan rebounded from the recent March low.
· Maintain cautious outlook as share prices for most big capped planters have priced in the recent strong CPO price. Currently, we see more negatives in the sector including:
a) more product substitution from palm to soya due to narrowing of CPO price discount vs soya to US$100/MT, which is below the 10 years average of US$124/MT;
b) potentially more soybean planting in US as soybean price has rallied 25% for the past 2 months;
c) high vegetable oil inventories in India and Pakistan to dampen higher imports; and
d) production recovery in 2H09 which should reverse the trend of inventory drop. We are maintaining our FY09 CPO price forecast of RM2000/MT. No change to our target price and recommendations for plantation counters under our coverage: IOI (BUY; TP: RM4.60); KLK (HOLD; TP: RM10.35); Sime (HOLD, TP: RM5.25), Sarawak Plantation (HOLD; TP: RM1.70); and NPC Resources (BUY; TP: RM2.20).
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