TA Coverage news : Plantation Sector in a Festive Mood

Slow down in production
MPOB released the monthly palm oil data for the month of August. Production for August declined 4.8% MoM to 1.67mn tonnes, moderating the YTD growth to 8.2% from 8.9% in previous month. This is within expectations as the Muslim fasting month of Ramadan fall within this month. On a YoY basis, production increased by 3.8% thanks to normalising yield and weather pattern.

Lower production lead to lower stocks
Inventory level declined further this month by 5.6% to 1.89mn tonnes after peaking to 2.05mn tones. The decline was in‐line with the drop in production volume as well as the high base effect in the previous month. Export/stock ratio increased slightly to 0.90x from a low of 0.88x in the previous month. Slight decrease in exports As expected, exports figure mirrored the rest with a slight drop of 2.7% to 1.69mn tonnes due
to slowing down in trade. Some of the traders were off for most part of the month especially toward the end of the month since the Hari Raya Puasa coincided with Malaysia’s National day, which translated into longer holidays. Some of the main exports destination continue to show increase in demand especially the US (+61% MoM), India (+29.4% MoM) and Pakistan (+14.5%). However, this was offset by a decrease in order from other regions of the world. Threat from the neighbouring country? Indonesia will be implementing the new tax structure soon, which involves reducing maximum tax rate for CPO exports even though the Indonesia Palm Oil Association urged the government not to impose higher export taxes on crude than its refined products as it could encourage smuggling and harm the processing industry. Following the new structure, which will take effect on 1st of October, a maximum tax of 10% will be introduced. The tax rate for RBD palm olein will be at 13% where as CPO will be taxed at maximum of 22.5%. As such, we could see some turbulence in September figure. However, we are leaving our earnings forecasts unchanged at this juncture as it is difficult to gauge the quantitative impact of the new tax structure on the Malaysian plantation players.

Neutral Call
We maintain our Plantation sector’s recommendation as Neutral as well as the CY11 average price assumption of RM3,300/tonne on the back of anticipation that the uncertain global economic outlook will negatively impact equity outlook. Sime Darby and Boustead remained the top stock picks in the sector. Key risk factors to our recommendations include, 1) sharp correction in crude oil price, 2) strong USD, 3) production of vegetable oils disappoints, and 4) impact of inflationary pressure on demand for vegetable oils.

Source: TA