Plantation- Better production recovery

· As Sept production staged a stronger recovery (+4.1% mom), inventory rose 11.5% to 1.58m MT on the back of flat exports (-0.4% mom).

· Sabah’s Sept output increased with a lower mom contraction of 4.8% (Aug: -13.2% mom) as it recovers from the aftermath of unfavourable weather since early 2009. YTD Sabah production declined 10.7% yoy to 3.73m MT. Malaysia’s total YTD output is 12.5m MT (-3.7% yoy) with the largest supply shortfall from Sabah.

· Sept exports relatively flat at 1.31m MT (-0.4% mom). Slower India and US palm oil intake was offset by increased imports from China, Pakistan and EU. Indonesia’s August palm oil export jumped 48.9% mom to 1.62m MT as the country removed palm oil export duty since August. This could be the reason why Malaysia’s exports were slower for both August and September. Malaysia’s October exports however should improve as palm oil operation in West Sumatra was temporarily disrupted by an earthquake in end Sept.

· CPO price: near term bearish, but medium term positive. CPO price drifted to a low of RM2103/MT in September on better production outlook. The key factors including weather and demand should dictate future price direction. While CPO output should improve over the next 2 months, we continue to believe that 2010 supply will remain sluggish with the impact of lower fertilizer usage and El-Nino weighing in. (Please refer to our previous sector report dated 17 Sept 2009) Demand meanwhile is expected to remain robust with India importing more palm oil to meet its oilseeds supply shortfall as a result of the recent drought. Already the Soybean Processors Association of India is forecasting a 10.1% decline for India’s soybean 2009 production. Global consumption for vegetable oil will also improve as the world economy gains strength. Near term CPO to range trade between RM2100-2300/MT before rising further in 2010 as supply concerns set in.

· Maintain our Neutral view for the sector with unchanged 2009 and 2010 CPO price assumption of RM2200/MT and RM2400/MT respectively. Our favourite pick remains KLK (BUY; TP:RM15.00) while Sime (HOLD; TP:RM7.90) and IOI (Trading Sell; TP:RM4.98) are expensive at current valuation. Other BUYs include Sarawak Plantation (BUY; RM2.60) and NPC Resources (BUY; RM2.96).