MAYBANK Investment Bank Research maintained its underweight call on the plantation sector as it believed bearish trends were forming for the segment.
 
It anticipated significant price corrections in the second half of 2009 (2H09) with rising production and slowing exports. “The medium term outlook remains uncertain against a potentially slow global economic recovery and increased trade protectionism,” it said in recent note. Its top sells were IOI Corporation Bhd and KL Kepong Bhd.

Maybank Research said there were signs of export weakness. “Malaysia’s May 2009 crude palm oil (CPO) inventory rose to 1.37 million tonnes while initial export estimates by ITS and SGS for the first 10 days of June indicate a sharp month-on-month (m-o-m) contraction. Inventory in June could rise to as high as 1.67 million tonnes, a level which would be bearish for CPO prices,” it noted.

“ITS and SGS estimate 28% and 35% m-o-m contractions in exports for 1-10th of June to 289,437 tonnes and 280,927 tonnes respectively. M-o-m exports to India and China slumped by 94% and 24% respectively during the period. While this may not be wholly representative of the overall trend in June, it nonetheless affirms our view that exports will slow as demand slumps, hurt by the recent spike in CPO prices, a more normalised CPO discount to soyoil to US$100 per tonne and sufficient stockpiles in India and China,” it added.

Maybank Research said Malaysia’s May 2009 inventory at 1.37 million tonnes was above its expectations (+5.7% m-o-m, -28.6% year-on-year). “The surprise was a spike in imports of 0.11 million tonnes (+169% m-o-m, +413% y-o-y), likely due to shipments from Indonesia to avoid export taxes slated to be imposed there beginning June 1. Production, exports and domestic consumption in the month of May were all within expectations,” it added.

 The local research house also noted that it was monitoring El Nino closely. “Weather models globally are pointing to possibly re-emergence of El Nino. However, we think it is too early to form a definitive opinion on its strength and potential impact on CPO production (which materialises with a 6-12-month lag) until August,” it said.

It maintained its RM2,000 per tonne CPO price outlook for 2009 through 2011. “We expect June ’09 inventory to rise to 1.47 million tonnes as exports continue to slow to an estimated 1.1 million tonnes in June. On a worst-case scenario, June inventory could rise to 1.67 million tonnes if exports slip to 900,000 tonnes and production stays at 1.4 million tonnes for the month. Either way, we believe CPO price upside is capped in the short term,” said Maybank Research.

Meanwhile, RHB Research maintained its average CPO price assumptions at RM2,300 per tonne for CY2009, RM2,500 per tonne for CY2010 and RM2,700 per tonne for CY2011.

It also maintained its target valuations for the companies under its coverage, with target PE of 14.5 times CY2010 earnings for the plantation divisions of the big-cap plantation stocks, 12.5 times CY2010 earnings for the mid-cap plantation stocks and 10 times CY10 earnings for the small-cap plantation stocks.

RHB Research said there was no change to its overweight stance on the sector, although it reiterated its advice to investors to look for price weaknesses before buying.

This article appeared in The Edge Financial Daily, June 12, 2009.