Malaysia stocks level for Dec-13 came in at 1.99m mt, 4% above market and our expectation of 1.92m mt. However, MoM trend is flattish as inventory only increased by 0.01m mt or 0.3%. We think that the culprit behind the higher-than-expected inventory is the lower local disappearance which unexpectedly declined 21% MoM to 177k mt. While this could be a sign that Malaysia’s biodiesel consumption has slowed down, we are not overly concerned as Indonesian biodiesel usage remained high as evidenced by very low palm oil imports by Malaysia at 24,574 mt (-72% YoY). The fundamental factor of strong Indonesian biodiesel demand should be supportive to CPO prices. Additionally, we think that the inventory uptrend should have ended and we expect Jan-14 inventory to decline by 2% MoM to 1.95m mt. This should be positive for CPO prices. We maintain our OVERWEIGHT call on the sector with our current CY14 average CPO price forecasts of RM2,800/mt unchanged. Our top picks are IOICORP (OP; TP: RM4.95) and TSH (TP: RM3.38). Other OUTPERFORMs include SIME (TP: RM10.30), KLK (TP: RM26.10), PPB (TP: RM16.60), TAANN (TP: RM5.00) and CBIP (TP: RM3.60). Maintain MARKET PERFORM on FGVH (TP: RM4.75), IJMP (TP: RM3.62) and UMCCA (TP: RM7.50). Maintain UNDERPERFORM on GENP (TP: RM10.00) due to excessive valuation which is even higher than big cap planters.

Dec-13 inventory level slightly higher than expected. Malaysia stocks level came in at 1.99m mt, 4% above market and our expectation of 1.92m mt. However, MoM trend is flattish as inventory only increased by 0.01m mt or 0.3%. We think that the culprit behind the higherthan-expected inventory is the lower local disappearance which unexpectedly declined 21% MoM to 177k mt. This could be a sign that Malaysia biodiesel consumption has slowed down due to higher CPO prices. However, we are not overly concerned as Indonesian biodiesel usage should still be strong as evidenced by very low palm oil imports by Malaysia at 24,574 mt (-72% YoY). The fundamental factor of strong Indonesian biodiesel demand should be supportive to CPO prices.

Exports remained strong at 1.51m mt despite declining 1% MoM. Among major palm oil consumer countries, note that only India is showing significant import decline of 33% MoM to 206k mt. We believe India traders may have delayed their purchase in view of higher CPO prices. Other countries continue to register growth such as China (+14% MoM to 362k mt) and Pakistan (+3% MoM to 66k mt). Strong demand growth seen so far bodes well for CPO price outlook.

Indonesia biodiesel demand is still strong. Note that in Dec-2013, Malaysia’s palm oil import (POI) from Indonesia remained very low at 24,574 mt or 72% lower YoY. We reckon that this is a sign that Indonesia is committed in implementing its biodiesel plan, which spurred higher domestic palm oil usage; thus curbing its export and lessening the export competition with Malaysia. In the long run, this is positive to CPO prices and benefits both countries.

Inventory uptrend should have ended and we expect Jan-14 inventory to decline by 2% MoM to 1.95m mt. On the supply side, we have assumed 16% decline MoM to 1.40m mt in line with the seasonal trend. On the demand side, exports should slip 15% MoM to 1.28m mt due to very cold winter in the northern hemisphere. Note that palm oil tends to solidify in cold weather and hence is used less in cold temperature. Overall, the expected first inventory downtick in five months would be positive to CPO prices.

TOP PICKS are IOICORP (TP: RM4.95) and TSH (TP: RM3.38). We believe IOICORP’s valuation should rerate higher post its demerger exercise with IOI Properties as it has emerged as the biggest and most efficient integrated palm oil players. Note that IOICORP’s FFB yield at 24.46mt per ha is the highest among big cap planters. As for mid-cap Top Pick, we like TSH (OP; TP: RM3.38) as it should benefit the most from higher CPO prices YoY due to its strong FFB output growth.

Source: Kenanga