Plantation Sector (Overweight) - Palm oil inventory up 11% MoM in September

* MPOB (Malaysian Palm Oil Board) released the country's plantation statistics for September yesterday. In summary, palm oil inventory rose 11% MoM to 1.6 million tonne in September underpinned mainly by a 4.1% expansion in production.

* Average price of crude palm oil (CPO) declined 8% MoM to RM2,227/tonne in September. Year-do-date, average CPO price was RM2,231/tonne. Price discount between CPO and soybean oil inched up from 18.4% in August to 20.3% in September. This was marginally higher than the five-year average of 19.9% and 10-year average of 18.3%.

* After a lacklustre production period in August, CPO production expanded 4.1% MoM to 1.6 tonne in September. In the first 10 months of the year, production of palm oil amounted to 12.5 million tonne - 3.7% lower than the same period last year. September's palm oil output has been the highest for this year so far.

* Industry players have indicated that they expect CPO production to peak in September or October. For the full year, MPOB is forecasting palm oil production at 17.6 million tonne, 4% lower than their previous estimate of 18.4 million tonne and flat compared to last year.

* Palm oil inventory rose from 1.4 million tonne in August to 1.6 million tonne in September. This is similar to the average inventory level for the past five years. Stock usage (stocks as % of exports) rose from 1.1x in August to 1.2x in September, which is below the five-year average stock usage ratio of 1.3x.

* After a 9.4% MoM decline in palm oil exports in August, palm oil exports were flat at 1.3 million tonne in September. YoY, palm oil exports inched up 1.2% in September. Year-to-date, palm oil exports totalled 11.7 million tonne, which is 5% higher than the same period last year.

* Palm oil exports were stagnant in September compared to August though a fall in exports to the United States and India was compensated by increased demand from China and the European Union (EU). Exports to the US declined 52% MoM to 48,796 tonne, lowest for the year while India imported 27% less palm oil in September versus August.

* Palm oil exports to China climbed 7% MoM to 423,736 tonne in September underpinned by the festive season while EU imported 48.3% more palm oil in September. From January-September 2009, palm oil exports to China inched up 2.4% YoY on the back of its cheaper price relative to soybean oil. Average price discount between the two commodities was 19.4% this year.

* China remained as the largest importer of palm oil from Malaysia, accounting for 25.3% of the country's exports for the first 10 months of the year. This was followed by Pakistan (accounting for 11.7% of Malaysia's palm oil exports), EU (10.9%), India (8.3%) and US (5.8%).

* We remain positive on the plantation sector as we believe that palm oil production should start to soften towards year-end while demand could be stabilising. This is reflected in the 3.9% increase in exports for the first 10 days of this month compared to the same period in September as reported by SGS. We have BUYS on IOI Corp, Kuala Lumpur Kepong, Kulim and Singapore-listed companies like Wilmar International and Indofood Agri-Resources.