We maintain our palm oil price assumptions at RM2,250/tonne in 2009
and RM2,500/tonne in 2010. Palm oil prices have rebounded close to
90% from their lows of RM1,400 to RM2,600 over the past six months.
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The bulls: 1) Malaysian palm oil inventories are at 20-month lows and
have fallen 40% from their peak; 2) the USDA Planting Intentions
Survey surprised the market, as soy acreage in the US came in much
smaller than expected; 3) China should start purchasing palm oil more
aggressively during spring; 4) there is talk of an El Nino.
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The bears: 1) palm oil production is expected to rise significantly in
2H09, due to the reversal of La Nina and tree stress, and the oil palms
are moving into their seasonally high production period; 2) the US is
planting record-high levels of soy in 2009; 3) export momentum to
India should slow significantly; 4) soy oil’s premium over palm oil has
narrowed to a 20-month low of US$116/tonne.
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We believe that news flow on the edible oils market may remain positive
for a couple more months, but the outlook is expected to turn bearish in
2H09. The unknowns are speculative funds, the weather and crude oil
prices. Foreign participation in the palm oil futures market in March 2009
is already at a 12-month high and close to recent highs in March 2008.
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Malaysian plantation companies trade at a 41% premium to their
Indonesian peers. We prefer Indonesian plantation companies such as
IFAR, LSIP and SGRO (in order of preference) over Wilmar, KL Kepong,
Sime Darby and IOI Corp., as valuations are far less demanding. Our
top sector pick is IFAR, trading at FY09 P/E of 10x.