• The Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for April 2018. Palm inventory in Malaysia declined for the fourth consecutive month as production and imports edged down MoM in April. Palm inventory in Malaysia fell by 6.4% from 2.32mil tonnes as at end-March to 2.17mil tonnes as at end-April. Consensus was expecting Malaysia’s palm stockpiles to be 2.24mil tonnes in April.
• Going forward, we expect Malaysia’s palm inventory to rise as production increases towards the peak productive months in 3Q. In 2017, Malaysia achieved the highest production level of 2.01mil tonnes in October. The highest level of palm inventory in 2017 was 2.73mil tonnes, which was recorded in December.
• Palm imports slid by 32.4% from 349,881 tonnes in 4M2017 to 236,385 tonnes in 4M2018. On a monthly basis, palm imports fell by 16.9% from 62,192 tonnes in March to 51,655 tonnes in April. We believe that palm imports may continue to shrink in the coming months as the export tax has been reinstated. The imposition of the 5% export tax would reduce the selling price of CPO, which would result in a lower cost of feedstock for palm refiners and oleochemical companies. This means that they do not have to import as much CPO from Indonesia as they would have to. The price of CPO in Indonesia is about RM200/tonne to RM300/tonne cheaper than Malaysia. Malaysia’s export tax on CPO was zero until 30 April 2018.
• CPO production in Malaysia rose by 9.3% YoY in 4M2018. In contrast, Oil World has forecast Malaysia’s CPO production to increase by 4.2% from 19.92mil tonnes in 2017 to 20.76mil tonnes in 2018F. On a monthly basis, CPO output was 1% weaker in April compared with March. Sabah recorded a 1.7% MoM fall in CPO production in April while in Peninsular Malaysia, CPO output shrank by 4.4%. On a positive note, CPO production in Sarawak improved by 10.5% from 285,704 tonnes in March to 315,755 tonnes in April.
• Malaysia's palm exports climbed by 20.1% YoY compared with the 9.3% YoY increase in production in 4M2018. The 20.1% YoY improvement in exports in 4M2018 was driven by India, which imported 99% more palm oil. It appears that the hike in the import duties of palm products in January has not affected India’s demand. Also, Malaysia’s palm exports to China expanded by 6.0% YoY in 4M2018 due to re-stocking activities.
• We are NEUTRAL on the outlook for the plantation sector in 1H2018. We expect the 1Q2018 financial results of plantation companies in May to be unexciting due to weak CPO prices. The increase of 5% to 32% in the CPO production of the plantation companies in our coverage would not be enough to offset the negative impact of the drop in CPO prices. According to the MPOB, average CPO price fell by 21.7% from RM3,152/tonne in 1Q2017 to RM2,467/tonne in 1Q2018. We do not have BUY recommendations in our stock universe. However, if investors would like exposure to the plantation sector, we would recommend Genting Plantations (fair value: RM10.75/share) for its low production cost per tonne in Malaysia and young oil palm trees in Indonesia.

Source: AmInvest Research - 14 May 2018