Analyst Reports -Plantation Industry

By Maybank Investment Bank

Rating: Neutral

19/02/2013 (The Star) - We hosted a lunch meeting featuring the Palm Oil Refiners Association of Malaysia (Poram), which was well-attended by analysts. Key take away from this meeting is that Malaysian refiners are positive on the recent change in crude palm oil (CPO) export tax structure as evidenced by the recent pick up in refining activities.

Refining margins are now positive due to cheaper input cost boost and we maintain our “neutral” call on the sector. Our Malaysian top buys are integrated players, Sime Darby and Sarawak Oil Palms, whose earnings are more defensive amidst recent palm oil price correction.

Poram believes the new export tax structure will benefit the industry (and it is positive for CPO prices) in improving Malaysia's competitiveness against Indonesia. Poram affirms that the new export tax in Malaysia has restored a more level playing field for Malaysian refiners against Indonesia.

Many Malaysian refiners are running at full or optimal capacity presently (compared to a year ago when some were forced to temporarily stop their production up to four to five months).

According to Poram, a refinery typically needs to run at a minimum capacity of 60% to be profitable. The abolishment of the export duty free quota this year (of around five million tonnes in 2012) will also help in making more CPO available in the market.

Our top “buys” among the Malaysian plantation players are Sime Darby and Sarawak Oil Palms. For a potential turnaround play, Mewah International an almost pure Malaysian refinery player listed on Singapore Exchange is expected to be the key beneficiary of recent positive refining margins.

Poram reckons that demand for palm oil has been slow (in recent months) but with prices being more competitive compared with Indonesia, there may be better off-take between March to April 2013. Poram foresees Malaysia's stockpile dropping to 2.3 million tonnes by May or June 2013, down from the historic 2.63 million tonnes in Dec 2012.