Plantation Sector, Signal from Price Resillience

Palm oil inventory recovered further as palm oil production picks up pace in April. Despite this, palm oil price has been relatively resilient. We maintain our view that palmoil will stage a countertrend rally up to July as Indonesia suffers production disruptiondue to tail-end effect of the 2009 drought.

After the brief recovery, palm oil price will weaken substantially in the 2H as Indonesia moves into a bumper crop period. The decline in Southern Oscillation Index also confirms the weakening of La Nina to be followed by Enso-neutral condition, which is positive for agriculture production overall.

Inventory up but not threatening
Despite the increase in production in both Malaysia and Indonesia, the rise in inventory to 1.671m tonnes is still far from being high enough to cause a collapse in palm oil price. Indonesian companies under our coverage reported production increases of between 14.5% – 24.7% suggesting very strong growth in Indonesia. We are encouraged that import from Indonesia declined to 63.4k tonnes from 133.5k tonnes a month earlier suggesting improved shipment.

Spread to soybean oil falling again
Palm oil’s discount is narrowing again and is now at USD74 per tonne. There is room for further narrowing in the next 2 months as palm oil supply gets disrupted by the shortfall in Indonesia’s production. At the same time, the Southern Oscillation Index has been falling suggesting the weakening La Nina and a return to an Ensoneutral condition which helps to improve soybean yield prospects in the upcoming North American planting season.

Maintain Neutral
There is no change to our sector view. We continue be Neutral on the sector but will underweight it after a rebound in the next 2 months. Short-term investors looking to cash in on the short-term rise in palm oil price should buy Indonesian names, which tend to be more responsive to palm oil price relative to Malaysian plantation stocks.

We like names like Golden Agri (Trading Buy, FV SGD0.83), London Sumatra (Buy, FV IDR3,151) and First Resources (Buy, FV SGD1.77). Investors wanting to lighten exposure to the sector will have an opportunity to do so at higher prices, in our opinion. Given the potential rebound, we are upgrading Genting Plant from Sell to Neutral with unchanged FV of RM8.26.