Plantation - 11 Jun 2009

Sector Update

Plantation - Inventory starts to climb

· As expected, May inventory starts to climb (+5.7% mom) to 1.37m MT on the back of strong production recovery (+8.5% mom) and higher imports (+169.0% mom).

· Entering seasonal high production period. Production in May surged 8.5% mom compared to a mere 0.8% gain in April. We expect production recovery to gain momentum going forward.

· Exports holding firm at 1.22m MT. Exports to China and EU rose while both India and Pakistan’s palm oil imports fell. India and Pakistan experienced lower mom imports of 16.1% and 16.7% respectively, in line with our expectation that both countries will reduce palm oil intake due to high inventory levels. China’s palm oil import meanwhile should increase going forward as summer is the seasonally high palm oil imports period.

· CPO price weakness setting in 3Q. CPO price has softened 10.3% from its peak of RM2789/MT in May to the current RM2501/MT. Our weaker CPO price outlook is premised on the impending rise of production and inventory in the coming months.

· Medium term CPO prospect to hinge on soybean supply and weather patterns. Should soybean production recovers strongly in 2009/10, price upsides for both soya and palm oil could be capped. The potential development of El Nino however could be a wild card for CPO price. The Australian Bureau of Meteorology observed that recent evolution of climatic patterns is consistent with the early stages of a developing El Nino. The probability of El Nino is believed to be above 50% but it is still possible that recent trends may stall without developing into a full El Nino. Historically, El Nino has been associated with lower palm yield which resulted in higher CPO price. CPO price could get a boost if a full blown El Nino developed over the next few months though the negative impact to palm yield are likely to manifest only in 2010. Maintaining our short term cautious stance while our CPO outlook will be reviewed again as we await for further developments of the weather patterns.

· Advocate profit taking strategy as we believe the current share prices for big cap planters have fully reflected the positives in the sector. Downgrading IOI (TP: RM4.60), KLK (TP: RM11.10) and Sime (TP: RM6.20) to Trading SELL while our target price stay. Investors are advised to top slice at current market strength before accumulating again at the next correction.