KUALA LUMPUR (Oct 12): CIMB Research is maintaining a “neutral” rating for the plantation sector, as most of the planters are fairly-valued at their current share prices.

The research house viewed the climb of CPO inventories in September as a neutral event.

The Malaysian Palm Oil Board (MPOB) reported last Friday that palm oil inventories rose 2% month-on-month to an 18-month high of 2.09 million tonnes in September, which is in line with CIMB’s projection but 2% above consensus.

CIMB Research said it is concerned about the recent decline in Brent crude oil prices to US$90 per barrel and weaker palm oil exports for the first 10 days of October.

“The lower crude oil price translates into a lower CPO biodiesel breakeven price of RM2,080 per tonne, which is below the current spot price of RM2,206.”

This may, over time, reduce the demand for CPO for biodiesel usage, which is negative,” it said.

CIMB Research projects that palm oil stocks in Malaysia could rise by 8% month-on-month to 2.27 million tonnes in October, driven by higher production. “We maintain our view that CPO prices will trade in the range of RM1,900-RM2,200 per tonne in October 2014,” it said.

“We currently forecast an average crude palm oil price of RM2,700 per tonne for 2014 but caution that there could be downside risk to around RM2,350-2,400 as the Jan-Sep 2014 average was only RM2,446,” it said.

CIMB Research noted that this could result in potential earnings downgrade of as much as 20% for stocks under its coverage.

It added, “We expect short-term CPO prices to retreat due to crude oil’s slump to US$90 per barrel, which lowers the CPO-biodiesel breakeven support to RM2,080/tonne, and weaker CPO exports for the first 10 days of October."

These are likely to more than offset the Malaysian government’s extension of the export duty CPO exemption till December, it said, adding that its neutral stance and top pick, First Resources, are intact.