Plantation- Inventory up again (Sector Update)

· Aug inventory edged upwards to 1.42m MT (+6.2% mom) as exports slowed (-9.5% mom). Production remains disappointing at 1.49m MT, with a marginal gain of 0.2%.

· YTD Sabah production fell 11.4% yoy to 3.24m MT as it is still enduring the brunt of extreme weather in early 2009. According to Genting Plantation’s (HOLD; TP:RM5.56) recent tele-con guidance, Sabah recorded >1200mm rainfall in 1Q, which was the highest rainfall in the past 5 years. Apart from deterring harvest activities, the harsh weather affected pollination and resulted in mildly formed fruit bunches with inferior weight and OER. While the weather effect is expected to last for 5-6 months, we opine that Sabah production will continue to be lacklustre for the rest of the year.-

· MoM exports dropped 9.5% to 1.32m MT on the back of slower intakes by China, India, Pakistan and EU. The lower exports suggested that buying for festive demand for Sept and October are mostly completed. Despite that, we note that Aug export was still higher than Feb-Jun monthly export figures.

· Volatile CPO price. CPO price reached the high of RM2515/MT in mid-August but had been sliding since in anticipation of higher oilseeds supply as soybean harvesting season for China, India and US commence in Sept. We believe near term CPO price will range bound between RM2100-2300/MT. CPO price is less likely to dip below RM2000/MT given the still tight supply condition.

· Go for value picks. Investors who wish to maintain exposure in the sector should go for laggards in view of rich valuation for most big planters. Our top pick for the sector is KLK (BUY; TP:RM15.00) which valuation still lags Sime (HOLD; TP:RM7.90) and IOI (Trading Sell; TP:RM4.98). Other BUY ideas include Sarawak Plantation (BUY; RM2.60) and NPC Resources (BUY; RM2.96). Hap Seng Plantation (Not Rated) also offers cheap valuation as it is trading at only FY10 PER of 11.1x based on consensus estimates. We maintain our 2009 and 2010 CPO price forecast at RM2200/MT and RM2400/MT respectively.