Plantation – Positive Fundamentals Prevailing Overweight
Sector Update
- Malaysia’s CPO production picked up slightly in Mar by 2.1% mom, while exports rose by a larger 10.8% mom. Yoy, production fell by 14.5% in Mar, while exports rose by 8.7%. As a result of the smaller mom rise in production vis-à-vis exports, closing CPO stock levels fell by 5% mom to 1.96m tonnes in Mar and annualised stock/usage ratio fell to 11.9% (from 12.4% in Feb).
- Supply/demand fundamentals of the vegetable oil industry is still looking positive with further downgrades of South American soybean crop estimates, planned reduction of soybean planting area in US and increasing dependence on CPO to replace other vegetable oil shortages.
- We maintain our CPO price assumptions of RM3,100, RM2,900 and RM3,000 for CY12-14 respectively and Overweight on the sector given the strong 1H CPO prices amidst a bullish fundamental outlook. In the 2H, we expect weaker prices on the back of seasonal factors for CPO and a potential improvement in soybean crop outlook for 2012/13. As such, while we believe there is still upside for the sector, we advise investors to buy on dips and to lock in profits once a decent investment return has been obtained, in view of the volatile commodity price outlook and in anticipation of a weaker price outlook in the 2H. Our top picks are Sime Darby and TH Plant (undervalued plays) and First Resources (FV = S$2.20), a beneficiary of the change in export tax structure in Indonesia.
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Utilities – Headwinds Receding For Tenaga Overweight (Upgraded)
Sector Update
- We are turning more positive on TNB given better visibility of its earnings outlook with the improved gas supply. While imported LNG pricing remains an issue, we believe implementation of a dual pricing system is more likely and therefore have an earnings neutral impact to TNB.
- As for YTL Power, the stock lacks catalysts while dividends are no longer attractive. However, sentiment may improve if the 1Bestarinet project helps to monetise its WiMAX network.
- Given our recent upgrade on TNB, we upgrade the sector to Overweight, from neutral.
Plantation mana ada overweight... hapseng so meek... haish