Plantation Companies Beware of weak Rupiah

Plantation Companies
Beware of weak Rupiah

• May12 palm oil exports continued to recover by 4.8% m-o-m, but was still 0.6% lower y-o-y
• Palm oil inventory fell 4.5% m-o-m as seasonally higher output may be backloaded in June
• Jump in Wilmar’s refining capacity in 3Q12 (by 3m MT) may shift demand to Indonesia in 2H12, supported by weak Rupiah
• Top BUYS: Astra A., Sampoerna A., Genting P., Sime, TSH R., Bumitama A., and First R.

May12 palm oil production slightly below forecast. Output for the month grew 8.7% m-o-m to 1.383m MT, but remained 21% lower y-o-y and was below our forecast of 1.67m MT. M-o-m growth was driven by  improving FFB yields in Sabah, Sarawak and Johor, which accounts for 61% of Malaysia ’s total output YTD. We expect strong 26% growth in June output to 1.746m MT in anticipation of backloaded FFB yield recovery. A possible onset of El Nino in Jul-Aug should not impact near term FFB yields, but 18-24 months after.

Lower inventory is bullish, but beware of shift in exports. Malaysia ’s May12 palm oil exports grew 4.8% m-om to 1.398m MT, led by stronger demand from the EU, Pakistan , and Bangladesh , but offset by lower Chinese and Indian imports. Increasing exports coupled with slower-thanexpected FFB yield recovery had resulted in further inventory drawdown to 1.765m MT (-4.5% m-o-m) by end May, below our 1.944m MT forecast. However, Malaysian palm oil inventories may increase again from here on premised on the following: (i) output will recover strongly in June, (ii) Wilmar will complete additional c.3m MT refining capacity, and (iii) aweaker Rupiah could shift international demand towards Indonesian refined products. Thus far, we understand the bottleneck has been Indonesia ’s limited refining capacity.

More headwinds for Malaysian refiners in 3Q12. This is premised on the projected significant increase in Indonesia ’s refining capacity. We expect processors in Indonesia – led by Wilmar – to progressively deplete CPO inventories and consume more 3Q12 output there. For this reason, refining capacity utilisation in Malaysia could drop in the near-term, and reverse the inventory downtrend observed thus far.

BUY Sampoerna A., Bumitama and First R.They should benefit from the expected shift in demand. We also like Genting P., TSH and Sime, which continue to offer upside from Indonesian output and/or consistent dividends.