Plantation - 17 Sep 2009

Plantation - Weighed by Supply Concerns (Sector Update)

· 2009 supply review. YTD production was disappointing at 10.9m MT (-4.0% yoy) with the largest output drop from Sabah (-11.4% yoy). Production from Peninsular Malaysia has picked up from April onwards with a smaller YTD drop of 1.2%. Meanwhile Sarawak plantation was not affected and had managed a 3.4% growth YTD.

· Lower 2009 production attributed to extreme rainfall in Sabah. Initially the production drop was assumed to be resulted from biological yield stress following a bumper harvest in 2008. Industry players later realised that they underestimated the rainfall impact in early 2009 which had led to inferior FFB and low OER up till Aug 09. We do not expect strong production recovery for the remaining 4 months in 2009 and anticipate 2009 CPO output at 17.0m MT (-4.0% yoy).

· 2010 production outlook. We envisage 2010 production to be sluggish still with low single digit growth. Impact from lower fertilizer usage will start to weigh by 1H10 while El-Nino will pressure yield from 2H10 onwards.

· Robust demand supported by strong exports. YTD imports from China, US and EU were relatively flat, but India and Pakistan’s intake had been very strong. Near term exports is likely to be softer as buying for Sept and Oct festivals had completed. India’s palm oil import however should stay buoyant and could surprise on the upside as the country’s crop is affected by worst drought in the decade.

· Neutral on the sector, switch to value picks. Our 2009 and 2010 CPO price forecast is RM2200/MT and RM2400/MT respectively. Our favourite stock for the sector is KLK (BUY; TP: RM15.00) which valuation still lags IOI (Trading SELL; TP: RM4.98) and Sime (HOLD; TP: RM7.90). Hap Seng Plantation (Not Rated) offers cheap valuation at only FY10 PER of 11x based on consensus forecast. Other BUY ideas include Sarawak Plantation (BUY; TP: RM2.60) and NPC Resources (BUY; TP: RM2.96).