Top Story : Plantation – Finally reaching peak production

Overweight

Sector Update

- Malaysia’s CPO production rose by 27.4% mom in Oct 09, while exports rose by 11.7% mom, resulting in higher CPO stock levels of 1.97m tonnes (up 25% mom from 1.58m tonnes in Sep 09). This led to higher stock/usage ratios of 10.9% (from 8.8% in Sep 09), although it is still significantly lower than Oct-08’s 11.7%. We do not think the current stock level is really anything to be worried about, given that this only represents about one and a half months of average historical monthly consumption of 1.28m tonnes, which is the “normal” level. We expect production levels to start trending back downwards towards end-Nov 09, while demand should continue to rise on the back of improved economic activity and the festive season, which should then result in stock levels declining from Dec-09 onwards.

- Over the recent month, there have been five main developments affecting the palm oil industry, including: 1) US soybean crops harvests picked up, but now risk on South American supply side; 2) El Niño – is it back?; 3) CPO demand may be curbed in China, but may rise in India in ST; 4) Crude oil price on uptrend- long term price uptrend intact; and 5) Narrowing discounts with soyoil.

- No change to our forecasts, as we continue to expect CPO to register a more sustainable pick-up in prices closer towards the end of the year (end Nov/Dec 09), after the peak production period ends, while fundamentals and price prospects for CY2010 are more positive. We maintain our Overweight stance on the sector and our Outperform calls on IOIC, KLK, Sime Darby and CBIP, Market Perform on Genting Plantations and Underperform on IJMP