palm report dec 2011

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KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION FOR IMPORTANT DISCLOSURES

KDN: PP 10744/06/2012

DECEMBER 2011

11 JANUARY 2012



MIDF EQUITY BEATWednesday, 11 January 2012

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Output at new record high

HIGHLIGHTS

• Decline in December output in line with seasonal factors. MPOB statistics released yesterday show

that CPO output in December fell by -8.2%mom to 1.49mmt. We had expected higher number, and

thought that December may spring a surprise with an output of 1.61mmt. This was due to relatively

benign December weather (refer to our preview report). Nevertheless, despite the monthly decline,

December’s output still jumped +21.3%yoy, pushing the full year CPO output in 2011 to 18.9mmt, an

all-time highs with an annual growth of +11.3%.

• No surprise on export. Total export in December dropped by a slight -4.5%mom to 1.59mmt.

However, full year export in 2011 increased by +7.9% to 17.9mmt, which is the highest level ever

recorded. This is mainly due to higher exports to China and India which account for 22% and 9% of

Malaysia’s total CPO export in 2011 respectively.

• Maintain NEUTRAL. We are maintaining our NEUTRAL recommendation on the sector and reiterate our

average CPO price forecast of RM2,700pmt in 2012. We maintain our BUY call for Sime Darby (Target

price RM11.00) because of its huge plantable areas that would provide higher potential output and

earnings growth. We continue to like TSH Resources (Target price RM2.25) as we expect TSH to

register higher output growth mainly contributed from its large immature areas and TH Plantation

(Target price RM2.51) due to its stable dividend payable.

MPOB DECEMBER 2011 STATS

• Seasonally weaker output. CPO output in December 2011 dropped -8.2%mom to 1.49mmt. This is

mainly due to lower output from major producing states with Peninsular Malaysia recording the largest

drop of -13.1%mom to 770,373mt. As reported by the Meteorological Department, the current La-Nina

phenomenon has not been as bad as that in previous years. This probably led to total CPO output in

2011 to surge by +11.3% to 18.9mmt, a new record high. Sarawak recorded the largest incremental

output in 2011, increasing by almost 24% to 2.69mmt.

CPO Production by Region (mt)

Dec-102011

2010 YTD2011

November December m-o-m y-o-y YTD y-o-y

PeninsularMalaysia

647,185 886,663 770,373 -13.1% 19.0% 9,498,120 10,373,311 9.2%

Sabah 400,876 495,417 492,259 -0.6% 22.8% 5,315,996 5,841,851 9.9%

Sarawak 184,691 244,588 232,261 -5.0% 25.8% 2,179,601 2,696,216 23.7%

Source: MPOB




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• Marginal drop in export. Total export in December dropped by a slight -4.5%mom to 1.59mmt mainly

due to lower exports to India, Pakistan and USA. December export to India and Pakistan down -

22.4%mom and -25.3%mom to 131,985mt and 166,981mt respectively. Export to USA in December

recorded the largest percentage drop of -33.0%mom to 85,857mt. Nevertheless, total CPO export in

2011 increased +7.9% to 17.9mmt thanks to higher export growth to India and China. Total export to

China and India in 2011 jumped +14.6% and +41.0% to 3.98mmt and 1.66mmt.

• Higher inventory keeps the stock-to-usage ratio above average. Inventory level in December slipped

-1.5%mom, but rose significantly by +26.2%yoy to 2.04mmt. The stock-to-usage ratio in December of

10.2% was 0.7%-point above its 5-year historical average. This is mainly due to high inventory in 2011

(especially in the last 6 months) and lower consumption. Consumption in 2011 dropped -12.0% to1.83mmt.

MONTHLY CPO OUTPUT AND EXPORT PALM OIL EXPORT TO MAJOR COUNTRIES

MONTHLY OER STOCK-TO-USAGE RATIO




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SUPPLY FACTOR: AMPLE VEGETABLE OILS SUPPLY, BARRING UNFORESEEN CINCUMSTANCES

• Improving global soybean inventory. USDA has forecast global soybean stocks in 2012 to increase by

a slight +1.6% to 64.5mmt. It also estimates India to produce 11.0mmt of soybean output in 2012, the

highest ever. The expectation on higher soybean output from India was based on better-than-average

yield assumption, as India received ample rain throughout the growing season.

• Indonesian CPO output in 2012 may register double-digit growth. According to the Agriculture

Ministry of Indonesia, CPO output from Indonesia in 2012 is expected to increase by 14% to 25.7mmt

mainly attributable to higher planted acreage. However, weather conditions remain the wildcard and

any weather abnormalities may disrupt production both in Malaysia and Indonesia.

DEMAND FACTOR: DEMAND IS GROWING BUT NOT ACCELERATING

• Threat of economic crisis and higher prices. We are still expecting a steady growth in global

demand for vegetable oils, despite the crisis in Europe. However, a prolonged debt crisis in Europe

that has elements of global contagion may dampen demand for vegetable oils. Rising CPO price is

also a cause for governments to take preemptive measures to slow down demand in order to reduce

inflationary pressures. In the final analysis, there is limited probability that demand factors will be

exciting this year.

OUTLOOK AND RECOMMENDATION

• We reiterate our NEUTRAL recommendation on plantation. We are maintaining our NEUTRAL view

on the sector as we are expecting no supply disruption, narrowing discount of CPO price to soybean

price and thinner margin for Malaysian planters due to rising production costs. Therefore, we

reiterate our RM2,700pmt of average CPO price forecast for 2012 and maintain our BUY

recommendations on:

o Sime Darby (Target price RM11.00) because of its huge plantable areas would provide higher

potential output and earnings growth;

o TSH Resources (Target price RM2.25) as we expect TSH to register higher output growth

mainly contributed from its large immature areas; and

o TH Plantation (Target price RM2.51) due to its stable dividend payable.




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FINANCIAL SUMMARY OF STOCKS UNDER COVERAGE

Company Rec.

Price @10

Jan2012(RM)

TargetPrice(RM)

EPS (sen) EPS Growth (%) PER (X) Div yield (%)

FY11f FY12f FY11f FY12f FY11f FY12f FY11f FY12f

TSH Resources BUY 1.98 2.25 30.77 38.66 46.5% 25.7% 6.04 4.81 3.8% 4.3%

TH Plantation BUY 2.40 2.51 23.68 26.41 29.3% 11.5% 8.87 7.95 4.2% 2.8%

GentingPlantation

NEUTRAL 8.89 8.87 58.28 55.07 36.3% -5.5% 13.93 14.74 1.0% 1.1%

Kulim NEUTRAL 4.32 3.20 45.72 36.72 58.8% -19.7% 7.00 8.71 0.6% 0.6%

Sarawak OilPalm

NEUTRAL 5.88 5.90 62.21 64.53 80.1% 3.7% 8.18 7.89 0.7% 0.6%

*SarawakPlantation

NEUTRAL 2.53 2.36 22.19 24.29 80.4% 9.5% 15.77 14.41 2.9% 3.1%

FY12f FY13f FY12f FY13f FY12f FY13f FY12f FY13f

Sime Darby BUY 9.08 11.00 68.30 60.74 12.0% -11.1% 13.16 14.80 3.3% 3.3%

IOI NEUTRAL 5.39 4.72 34.67 36.16 -0.2% 4.3% 14.91 14.30 2.4% 2.5%

KL Kepong NEUTRAL 24.84 18.90 123.54 112.60-

16.3%-8.9% 17.81 19.54 2.5% 2.3%

IJM Plantation NEUTRAL 3.18 2.71 21.70 25.79 18.1% 18.8% 12.44 41.47 3.3% 3.3%

*Target price and recommendation is currently under review Source: Company, forecast by MIDFR

DAILY CPO PRICE CHART

Zulkifli HamzahJasmaliha Jaafar

[email protected]




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MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X).

(Bank Pelaburan)

(A Participating Organisation of Bursa Malaysia Securities Berhad)

DISCLOSURES AND DISCLAIMER

This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for

distribution only under such circumstances as may be permitted by applicable law.

Readers should be fully aware that this report is for information purposes only. The opinions contained

in this report are based on information obtained or derived from sources that we believe are reliable.

MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or

implied, as to the accuracy, completeness or reliability of the information contained therein and it should

not be relied upon as such.

This report is not, and should not be construed as, an offer to buy or sell any securities or other financial

instruments. The analysis contained herein is based on numerous assumptions. Different assumptions

could result in materially different results. All opinions and estimates are subject to change without

notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF

AMANAH INVESTMENT BANK BERHAD.

The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may

have interest in any of the securities mentioned and may benefit from the information herein. Membersof the MIDF Group and their affiliates may provide services to any company and affiliates of such

companies whose securities are mentioned herein This document may not be reproduced, distributed or

published in any form or for any purpose.

MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS

STOCK RECOMMENDATIONS

BUY Total return is expected to be >15% over the next 12 months.

TRADING BUYStock price is expected to rise by >15% within 3-months after a Trading Buy rating has beenassigned due to positive newsflow.

NEUTRAL Total return is expected to be between -15% and +15% over the next 12 months.

SELL Total return is expected to be -15% over the next 12 months.

TRADING SELLStock price is expected to fall by >15% within 3-months after a Trading Sell rating has beenassigned due to negative newsflow.

SECTOR RECOMMENDATIONS

POSITIVE The sector is expected to outperform the overall market over the next 12 months.

NEUTRAL The sector is to perform in line with the overall market over the next 12 months.

NEGATIVE The sector is expected to underperform the overall market over the next 12 months.

palm report dec 2011

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