Sector Focus KLK, PPB, Utd Plantations rise on lower palm oil output, inventory

by **Cals** Tue 11 Mar 2014, 12:19

Sector Focus KLK, PPB, Utd Plantations rise on lower palm oil output, inventory

Business & Markets 2014

Written by Chong Jin Hun of theedgemalaysia.com

Tuesday, 11 March 2014 11:48

KUALA LUMPUR (Mar 11): Plantation firms Kuala Lumpur Kepong Bhd (KLK), PPB Group Bhd and United Plantations Bhd rose among the bourse's top gainers in anticipation that lower palm oil output and inventory would support the commodity's price.

Dry weather in Malaysia is prompting anticipation of lower oil palm fresh fruit bunch production, hence, less CPO.

At about 11.20 am, KLK rose 20 sen or 0.8% to RM23.98 while PPB climbed 26 sen or 1.6% to RM16.40. United Plantations traded 60 sen or 2% higher at RM24.90.

Yesterday, the Malaysian Palm Oil Board (MPOB) reported that February 2014 palm oil inventory fell 14.25% month-on-month to 1.7 million tonnes from 1.9 million tonnes in January this year.

MPOB said CPO output declined 15.31% to 1.3 million tonnes from 1.5 million tonnes. Meanwhile, palm oil exports decreased 1.25% to 1.3 million tonnes from 1.4 million tonnes.

Today, Alliance Investment Bank Bhd analyst Arhnue Tan said rival soybean suppply shortage due to dry weather in the Americas was expected to support CPO prices.

"We view that the crop losses in Brazil and potential export bottlenecks from Argentina in 2Q could keep prices fairly buoyant during 2Q14. For palm oil, shortages in soybean supplies could see substitution demand picking up going forward and on this front, CPO prices could be buoyant as well.

"That said, to bring prices convincingly past RM3,000/mt, there will need to be an extended drought in Malaysia and Indonesia, and convincing pick-up in exports, which are still weak. We maintain our CPO ASP (average selling price) assumption of RM2,600/mt for now but keep a close watch on crop developments in the palm and soybean markets," Tan said.

Looking ahead, she expects oil palm production to recover this month (March), hence, capping CPO prices below RM3,000 a tonne.

Alliance is keeping its "neutral" call on the local plantation sector.

Maybank Investment Bank Bhd analyst Ong Chee Ting takes a longer-term view of the impact of dry weather on oil palm production.

In a note today, Ong said prolonged dryness would reduce CPO yields in the next two years.

"The recent lack of rainfall in Malaysia and the region in recent weeks continues to worry the industry. The lack of rainfall has delayed ripening of the fruits, hence limiting CPO supply and supporting prices.

"The next 2-3 weeks are a crucial period as rainfall is required. A prolonged dryness will impact CPO yield in 4Q14 and over the next 2 years," Ong said.

Maybank is maintaining its 2014 and 2015 CPO ASP forecast of RM2,600 and RM2,377 a tonne respectively.

Ong said for every RM100 a tonne change in Maybank's CPO price forecast, earnings forecast for plantation firms under its coverage changed by 5% to 12%.

"Most sensitive to CPO price changes are Ta Ann, TH Plantations, Sarawak Oil Palms and Felda Global," Ong said.