• The Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for May 2018. Palm inventory in Malaysia eased for the fifth month in a row. Palm stockpiles in May edged down by 0.5% from 2.18mil tonnes as at endApril to 2.17mil tonnes as at end-May. The palm inventory of 2.17mil tonnes was above consensus estimates of 2.13mil tonnes for the month of May.
• We believe that Malaysia’s palm inventory in May turned out to be higher than expected due to a drop in exports. Palm exports fell by 15.7% MoM to 1.29mil tonnes in May. While CPO production did decrease in May, the decline in exports was sharper.
• Palm exports to India contracted by 74.6% MoM to 75,269 tonnes in May while shipments to the European Union fell by 33.7%. On a positive note, China’s imports of Malaysia’s palm products improved by 42.2% MoM in May. Going forward, we expect China and India’s demand to pick up ahead of the Mooncake and Deepavali festivals before tapering off towards the year-end. Comparing 5M2018 against 5M2017, Malaysia’s palm exports rose by 11.9% to 7.21mil tonnes.
• CPO production in Malaysia slid by 2.1% MoM to 1.53mil tonnes in May. We believe that CPO production would rise from July onwards as oil palm trees enter the peak production period in 3Q2018. We reckon that CPO output in Malaysia would still be unexciting in June as estate workers return home for the Hari Raya festivities. CPO output in Sabah declined by 6.6% MoM to 392,059 tonnes in May while in Peninsular Malaysia, CPO production slid by 3.9%. On the other hand, CPO output in Sarawak expanded by 8.6% from 315,755 tonnes in April to 342,986 tonnes in May. Comparing 5M2018 against 5M2017, Malaysia’s CPO production climbed by 5.3% to 7.59mil tonnes.
• Malaysia’s palm imports dropped by 8.9% MoM to 43,404 tonnes. We believe that imports of palm oil by downstream companies in Malaysia would continue to ease going forward. The price differential between CPO in Indonesia and Malaysia is expected to narrow as the export tax for crude palm oil in Malaysia has been reinstated at 5% each in May and June 2018. The export tax reduces the selling price of palm oil, which benefits Malaysian palm refiners that use crude palm oil as a feedstock.
• We are NEUTRAL on the outlook for the plantation sector in 2H2018. We are assuming an average CPO price assumption of RM2,450/tonne for 2018F (2017: RM2,792/tonne). We expect plantation results in 2Q2018 to be unexciting due to flat CPO prices and production. Although we do not have any BUY recommendation, we would recommend Genting Plantation (GenP) for investors who would like exposure to the plantation sector. We have a fair value of RM10.75/share for GenP, which implies an FY19F PE of 25x. We like GenP for its low production cost per tonne in Malaysia and young oil palm trees in Indonesia.

Source: AmInvest Research - 12 Jun 2018