Saturday December 18, 2004By Mayban ResearchCPO production declined 7.5% from 1.36 million tonnes in October 2004 to1.26 million tonnes in November 2004. Nevertheless, stockpile of CPO (+4%)and palm kernel (+13.6%) increased due to the seasonally lower exports(-6.1% during the month). Palm oil production headed for a seasonaldecline in October after production peaked in the month of September.

Exports to experience seasonal decline

Palm oil exports declined during the month (-6.1%) which is not surprisinggiven that palm oil exports traditionally experience a seasonal declineduring this period. We believe the decline in November was also partlyrelated to the end of two major festivals in the month of October.Essentially, the decline in exports was caused by the decline in exportsto China (-34k tonnes, -12%), India (-27k tonnes, -34%), and Bangladesh(-21.7k tonnes, -51.1%) which more than offset the increase in exports tothe US (+12k tonnes, +53%) and EU (+34k tonnes, +20.1%).

On a cumulative basis, palm oil exports remain firm. Exports to the twolargest palm oil importers, China and the EU, were up 8.5% and 11.4%respectively, while exports to Jordan and the US showed tremendous growth.The firm exports to the EU, is believed to be linked to the stance againstgenetically modified organisms (GMO) which is prevalent in soybeans. Weare not overly concerned with the slowdown in palm oil exports to China,as the country has been aggressively importing over the last few monthssince it imposed restriction on soybean imports in August.

As for India and Pakistan, given the recent weakening of soybean pricesand its derivatives, there will be a tendency to switch to soybean oilgiven the narrowing price differential between the two competing oils.Nevertheless, a further significant decline in exports to India andPakistan is not expected given the drop in domestic oilseed supplies.India's output of winter oilseeds, sown in June and July and harvested inOctober and November, is estimated to have fallen to 12.6 million tonnesfrom 13.9 million in the previous year because of patchy rains in somegrowing areas. Production of groundnut, one of the main winter oilseeds,has dropped to 3.9 million tonnes from 5.3 million tonnes last year.

We would also like to highlight that palm oil exports to the US have risensubstantially (YTD +55.4% as of November 2004), and we believe this is alikely result of US FDA’s ruling on trans-fatty acids (TFA) food labellingwhich takes effect on Jan 1, 2006. Trans-fatty acids, which are believedto cause heart diseases and obesity, is present in soy oil but not in palmoil. Several US food producers have switched out of soy oil to advertisethe absence of trans-fatty acids in their products.

Jordan has emerged as one of the largest buyers of palm oil this year,importing close to 450,000 tonnes of palm oil as at November 2004,compared to the 48,000 tonnes registered in the corresponding period lastyear. This is essentially due to the sanctions imposed on palm oil exportsto Iraq (which has historically been buying about 200,000 - 250,000 tonnesof palm oil annually). Now, palm oil is channeled to Iraq via Jordan.

Average CPO price target intact

YTD average CPO price of RM1,680/tonne is 8% higher than the average CPOprice registered in the same period in 2003. As such, our full yearaverage CPO price target of RM1,600/tonne remains intact. We are stillmaintaining our average CPO price target of RM1,600/tonne for FY05.

Outlook

Given the anticipation of firm palm oil exports, coupled with theexpectation of seasonally lower production in fourth quarter and firstquarter next year, palm oil prices should remain firm. We reiterate ourOverweight stance on the sector.

Recommendation

We maintain our Trading Buy recommendation on Golden Hope, with a fairvalue of RM4.40 (RM5.50 cum I&P distribution). The rationalisationexercise will result in it deriving immediate earnings recognition fromthe injection of Austral Enterprise's plantations. Dividend yield isattractive at 6%.

We earlier downgraded IOI Corp to Hold as the current share price is closeto our target price of RM9.70. Nevertheless, IOI Corp offers investors oneof the best exposures to the plantation sector given its well-integratedplantation business.

Also, the speculation surrounding the prospective privatisation of IOIProperties should continue to generate trading interest on the stock.

We had earlier downgraded Kumpulan Guthrie to an Avoid due to its failedmerger with Guthrie Ropel and Highlands & Lowlands and pending itsreorganisation plans going forward.

In our latest results review, we have reverted to our Hold recommendationwith a revised fair value of RM2.45 (vs RM2.96 previously) for the shares,pegging EPS05 of 18.5 sen to a target PER of 13.2x. Dividend yield is 3%based on the regular annual DPS of 8 sen.

We maintain our Hold recommendation on KL Kepong, maintaining our fairvalue of RM7.20 for the shares. Its plantation segment will primarilydrive earnings, as we do not expect significant contributions from itsother divisions (retail, property, Yule-Catto and others).

Its China operations will provide an earnings kicker when its oleochemicalmanufacturing facility commence operations by end FY05. We have notfactored in the earnings contributions from the new plant.

PPB Oil Palms remains our favourite pick for the sector. Valuations arestill undemanding and dividend yields are attractive at 4.8%. We maintainour fair value of RM3.70 for the shares.