DBS Plantation: Yields falter again

* April palm oil production fell 5.8% m-o-m because of lower Peninsular yields, MPOB data revealed
* Stock/usage fell again to 8.8% from 9.0% despite a drop in exports and surge in imports
* We expect prices to remain stable in the near term, but foresee more downside in 4Q10
* Pick high volume-growth stocks such as First Resources, IndoAgri and Sampoerna Agro; TSH Resources is upgraded to Buy from Hold

Yield falters again. Malaysian Palm Oil Board (MPOB) data released yesterday revealed palm oil production of 1,388.2k MT in April (-5.8% m-o-m) was c.5.9% lower than expected. While FFB yield in Sabah continued its recovery (+13% m-o-m), those in Sarawak stepped back by 2% m-o-m. FFB yields in Peninsular Malaysia also declined by 4% m-o-m. This may be due to the lagged effect of the absence of rainfall in 2M10. We still expect May production to pick up by 14% to 1,490k MT (relatively
unchanged).

Stock/usage ratio will remain low. While April exports also declined by 8% m-o-m to 1,283k MT and imports surged by 19% m-o-m to 105k MT, April stock/usage ratio declined to 8.8% from 9.0% in the previous month. We expect stock/usage ratio to increase marginally next month premised on the assumption that higher exports to India would be offset by lower exports to the EU (given April's 66% m-o-m jump). Exports to China are expected to remain flat in view of increasing soybean-crushing
activities in the coming months.

Prices to drift lower in 2H10. Recent price movements suggest that both palm and soybean oil prices could remain range-bound in the near term. We believe any reserve selling by Argentine soybean farmers will now backload higher soybean supplies towards 4Q10, during the US harvest period. Hence, we would then expect higher soybean oil production to weigh on palm oil prices.

Prefer high-volume growth stocks. We continue to recommend upstream planters with significant volume growth prospects - in view of flattish CPO price forecasts for the next three years. These include First Resources, Indofood Agri and Sampoerna Agro. In this report we also upgrade TSH Resources to Buy (from Hold), as the recent correction has created significant upside to our TP. TSH FFB volume CAGR over the next 3 years is a whopping 17% (fuelled by aggressive expansions in Indonesia); while its FY11F PE still trades at undemanding 10.3x - second lowest in our coverage.