CPO inventory expected to ease from record high

CPO prices have fallen c.20% since early September, as Malaysia’s stockpile of palm oil hit a record high of 2.5mil tonnes. Historically, CPO production peaks in Oct, and we expect inventory level to start coming down in the months ahead. CPO is currently trading at US$342/MT discount to soybean oil, which is way above its historical long-term average of US$189/MT. We believe that the supply tightness in other vegetable oils, coupled with the low production season, should provide support to CPO price at least till the first half of 2013.

Upstream planters offered mixed bag of results

Upstream plantation companies had offered a mixed bag of 3Q results. Golden Agri’s 3Q core net profit dropped 23% YoY, on weaker selling prices, higher inventory, and losses from its China operations. We were surprised by the US$20m losses for its China agribusiness, which were related to higher soybean costs. However, with soybean prices fallen c.19% since early Sep, this should translate to lower feedstock costs and better margins coming 4Q. Its CPO production growth, on the other hand, was 24% higher QoQ, hitting a record high of 647k tonnes. We expect 4Q production figure to be even stronger.

Upgraded Wilmar to Accumulate

For commodity trading companies, Noble Group reported lower 3Q earnings due to weak agriculture performance, while Olam’s 1Q earnings improved on stronger volumes. Wilmar’s 3Q results were in-line with our expectations, recording better qoq performance. We upgraded Wilmar to Accumulate on improving crushing margins. In particular, earnings from Oilseeds & Grains bounced back from losses in 3Q, reversing its 2Q loss, reducing its total 9M12 loss for the segment to US$32m. Hence we see potential upside for its earnings in this segment coming 4Q. Overall, we are positive in the long-term fundamental of the company.

Commodities Sector

Golden Agri (Accumulate); TP: $0.68
Wilmar (Accumulate); TP: $3.47

Source: PhillipCapital Research - 03 Dec 2012