Plantation Unexpected output jump in May11 - DBS

• May11 palm oil output jumped 13.7% m-o-m to 1.740m MT – 21% higher than expected
• Exports grew by a less-than-expected 4.3% m-o-m in May11 to 1.402m MT. Hence, May11 inventory piled up 14.8% m-o-m to 1,918m MT
• We raised Malaysia ’s CY11F-12F CPO output by 7% each. No change in our CPO price forecasts
• Prefer processors and upstream laggards. Top picks: Sampoerna A., KLK, Sime, Mewah, Wilmar, First R.


Stronger than expected May11 production. Malaysia ’s May11 palm oil output was unexpectedly strong, rising by 13.7% m-o-m to 1.740m MT. This was 21% higher than our forecast of 1.442m MT – due to what we believe are recoveries in biological tree stress and some ease in labour shortage. Strongest yield improvements were reported in Kelantan (+36.4% m-o-m); Terengganu (+25.3% m-o-m), Pahang (+16.3% m-o-m); Johore (+14.6% m-o-m), and Sabah (+11.3% m-o-m). We understand that Jun11 Sabah output thusfar is showing continued upward trend.

May11 exports growth weaker than expected. While May11 palm oil exports grew 4.3% m-o-m to 1.402m MT, this was 9% below forecast, as exports to EU and Egypt dropped, only partially offset by stronger demand from India and Pakistan . Demand from China grew by an unexciting 4.5% m-o-m, as it is releasing domestic edible oil and oilseeds reserves. A combination of higher output and weak exports resulted in inventory pile up to 1.918m MT – significantly higher than 1.633m MT forecast. This level is the highest since Jan10. Stock/usage ratio had accordingly moved to 10.3% vs. 8.8% expected.

Raised Malaysia ’s CPO output by 7%. We expect Jun11 output to taper off slightly to 1.682m MT (raised from 1.449m MT in previous forecast). Malaysia ’s CY11F-12F palm oil output is also raised by 7% to 18.851m MT and 19.941m MT, respectively. We expect exports to reach 1.574m MT in Jun11 (+12.3% m-o-m), on depleting buyers’ inventories and deteriorating crop outlook of substitutes in the current season. Palm oil inventories however, are forecast to break 2m MT in Jun11, peaking at 2.353m MT by end Sep11. No change to our CPO price forecast given stronger-than-expected YTD crude oil price.

Accumulate processors and upstream laggards. We continue to recommend processors as they should benefit from the expected larger CPO supply (top picks: Wilmar and Mewah). We also like upstream laggards for their valuation gap to peers (top picks: Sampoerna A., KLK, and First R.). Please note that our DCF valuations are based on lower CPO price expectations from FY12 onwards. We also like Sime Darby’s potential earnings momentum from its restructuring.