Yesterday, prices for the forward 3-month CPO futures surged convincingly to break its psychological level of RM2700 to close at RM2714. Note that this is the highest level in 17 months since Sep 2012. Additionally, soybean oil (SBO) prices for May-2014 contract also surged by 3.0% to close at 40.66 cents per pound due to concerns of supply shock caused by extreme weather in South America. We also gather that Pertamina in Indonesia has recently completed its 2nd tender of biodiesel and this should bode well for CPO prices too as it creates additional sustainable demand for CPO. Lastly, we have revised down our Feb-2014 inventory forecast by 4% to 1.80m (from 1.88m mt previously) and this is a significant 7% reduction MoM against Jan-2014 level of 1.94m mt. All these positive factors are expected to be supportive to CPO prices and we reiterate our view that CPO prices should continue to appreciate up to RM2900/mt by end Mar-2014 as we expect sustained inventory downtrend throughout 1Q14. Reiterate OVERWEIGHT on the sector with our current CY14 average CPO price forecast of RM2,800/mt unchanged. Our top picks are IOICORP (OP; TP:RM4.95) and TSH (OP; TP: RM3.38). We also have OUTPERFORM calls on 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 its excessive valuation which is higher than big cap planters.

CPO surged past RM2700 level convincingly; expect RM2900 by end-March 2014. Yesterday, prices in the CPO forward 3-month futures market surged RM32 or 1.2% to close at RM2714/mt. Note that this is the highest level in 17 months and is not seen since Sep 2012. This is in line with our bullish view on CPO prices so far and we reiterate our view that CPO prices should continue to appreciate up to RM2900/mt by end Mar-2014 as we expect sustained inventory downtrend throughout 1Q14.

SBO rally even more by 3.0% to break 40 cents level. Overnight, SBO prices for May-2014 contract surged by 1.19 cents to close at 40.66 cents per pound or its 8-week high. We reckon that this could by caused by concerns of soybean oil supply shock caused by extreme weather in South America. According to Oil World, irreversible soybean crop losses have occurred in several parts of southern Brazil, parts of Argentina, Paraguay and Uruguay. We believe that CPO prices should appreciate further in line with better SBO prices as both commodities are commonly used as substitutes for each other.

Pertamina completed its 2nd tender of biodiesel. Recently, on 17-Feb-2014, Pertamina has announced that it has managed to secure 1.14m kilolitre of biodiesel through its 2^nd tender. Combined with the first tender, Pertamina has effectively secured in total 2.4m kilolitre of biodiesel or 45% of total supply of 5.3m kiloliter needed for 2014 and 2015. The successful tender is in line with our view that Indonesia is serious on its biodiesel policy and we are confident that the full supply of 5.3m kiloliter will be fully secured. Additionally, we also believe that the monthly tracking of Indonesia biodiesel usage can be done by using palm oil imports (POI) into Malaysia. Note that POI in Jan-2014 is only 15,782 mt or 85% lower YoY and this should be taken as a sign that the biodiesel policy implementation in Indonesia is swift.

Feb inventory forecast revised down by 4% to 1.80m mt due to stronger than expected export data so far. Based on cargo surveyors’ data, palm oil export for 1st half of Feb has shown significant growth in the range of 27%-32%. As the data came in way above our earlier estimate of 5% export decline, we have revised up our export to slight growth as we believe the shorter calendar days in Feb should neutralize the growth to single digit growth. Overall, we have revised down our inventory forecast to 1.80m (from 1.88m mt previously) and this is a significant 7% reduction MoM against Jan-2014 level of 1.94m mt. This is expected to be supportive to CPO prices.

Top Picks are IOICORP and TSH. We believe IOICORP’s valuation should rerate higher post its demerger exercise with IOI Properties as it emerged as the biggest and most efficient integrated palm oil players. Note that IOICORP’s FFB yield at 24.46mt per ha is also the highest among big cap planters. As for mid cap Top Pick, we like TSH due to its high FFB growth. Recall that its 9M13 FFB output is already showing 34% growth YoY to 379,673 MT (strongest growth among its peers).

Source: Kenanga