Plantation Rising inventory to dampen prices - DBS

· Jun11 palm oil output was flat m-o-m at 1.753m MT – in line with expectations
· But jump in exports (+12% m-o-m to 1.581m MT) was not enough to lower end-stock level, which rose 7% m-o-m to 2.053m MT
· CPO prices to resume downtrend, as end-stock is forecast to stay above 2.0m MT until year-end
· Processors and upstream laggards recommended. Top picks: Mewah, Wilmar, First R., Sampoerna A., KLK, Sime.

Flat Jun11 output. MPOB yesterday reported that Malaysia ’s palm oil output reached 1.753m MT in Jun11 (flat m-o-m) – in line with our expectations. FFB yields in Kelantan and Pahang – which jumped by 16-36% m-o-m in May11 – fell back by 3-4% m-o-m; while those in Johore, Terengganu and Sabah increased just marginally. We anticipate Jul11 output to remain flat (forecast to increase 1% m-o-m to 1.771m MT) before peaking to 1.805-1.831m MT in Aug-Sep11.

Jump in Jun11 exports failed to cut end-stock. While Jun11 exports recovered strongly (boosted by 44-124% jump in shipments to India, Egypt, Pakistan, and EU-27), aggregate export volume was not enough to reduce end-Jun11 stock level, which rose 7% m-o-m to 2.053m MT. Palm oil imports also remained steady at 88.3m MT, as we suspect shipments from Indonesia were front-loaded to avoid higher progressive export tax set for Jul11 (to 20% from 17.5%).

CPO price downtrend to continue. We believe CPO prices owe its current resiliency to weak soybean crush margins (see page 3) and expectations of 2% y-o-y drop in US soybean harvest, which may tighten near-term soybean oil supplies. In the coming months, palm oil exports are also expected to rise on stock replenishment, some substitution, and stronger demand during Ramadan. However, output is likewise forecast seasonally ramp up over the same period, boosted by yield recovery and new maturities. In our estimation, this should raise end-stock levels through end Aug11 and keep them above 2m MT until end of the year. Therefore, we expect CPO prices to resume its downtrend in 4QCY11.

We recommend processors and upstream laggards. We believe processors are key beneficiaries of the recent drop in CPO prices and strong rebound in CPO volume since end-Mar11. At current prices, we prefer Mewah over Wilmar (both have BUY ratings), given its less exposure to weak soybean crush margin and q-o-q stronger palm oil imports growth by the MENA region’s vis-à-vis China. We also like upstream laggards such as First R., Sampoerna A. and KLK as we believe they have priced-in weak CPO price expectations.