Sector Update
♦ Malaysia’s CPO production fell back in Apr 10 by 5.8% mom, while exports also fell by 8.2% mom. Despite the larger drop in exports versus production, closing CPO stock levels fell to 1.62m tonnes in Apr (from 1.65m tonnes in Mar). As a result, stock/usage ratio fell further to 8.8% (from 8.9% in Mar and versus the 7- year average of 9.1%). We expect this to moderate for another 1-2 months, as the weak seasonal production period continues and as exports pick up on an improved economic outlook, although this should start reversing subsequently, as we approach the peak seasonal production period.
♦ Over the recent month, there have been five main developments including: 1) Argentina soybean oil ban continues; 2) India asking to re-impose import tax; 3) Malaysian labour issues escalating; 4) Crude oil price dropped drastically; and 5) Narrowing of discounts with soyoil and rapeseed oil.
♦ No change to our CPO price assumptions and forecasts. We maintain our Overweight stance on the sector and our view that in the volatile market environment this year, the more liquid big-cap stocks will be favoured, especially since the gap between the big-cap and smaller-cap stocks has narrowed recently. We continue to rate KLK as our top pick, due to its inexpensive valuations (as it remains the cheapest amongst the big-cap plantation stocks currently) and for its strong management with a good track record.
RHB Equity 360° - 11 May 2010 (Plantation, KLK; Technical: Tan Chong)
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