• Inventory surged 8.8% mom to 1.94m tonnes in August.

• CPO production declined slightly by 0.9% mom to 1.81m tonnes.

• Export increased 6.4% mom to 1.49m tonnes; due to restocking activities.

• Momentum in production is expected to continue as we head for a peak months in September and October.

• We revised our average 2017 CPO price projection higher to RM2,635/MT from RM2,550/MT. Maintain our Neutral view.

August’s CPO production declined slightly.

Malaysia’s CPO production declined 0.9% mom to 1.811m tonnes (+6.39% yoy) in August 2017, dragged down by lower output from Perak, Sabah, Negeri Sembilan, Selangor and Pahang. Perak recorded a bigger drop of 7.0%, followed by Sabah -5.3%, Negeri Sembilan -4.5%, Selangor -4.2% and Pahang by -2.3%. However, total FFB production for the period of Jan-Aug 2017 improved by 13.57% yoy to 12.354m tonnes – as yield recovered, and larger areas reaching maturity and higher yielding age bracket. Production is expected to reach its peak by end of September and October before normalizing in November and December – as such we maintain our prediction that CPO production would reach 19.28m tonnes by end of December 2017 (+11.3% yoy).

Export demand improved in August

Palm oil export volume increased 6.43% mom to 1.487m tonnes vs. 1.379m tonnes recorded in July 2017 (-18.5% yoy) as major importing countries ,China and India, registered higher mom demand - with China registering a jump of 13.5% whilst India increased 2.9%. We believe the higher demand from these countries is due to their restocking activities to meet higher demand for Deepavalli and Mid-Autumn festivities.

However, we are cautious on export demand from India as the country has increased import tax on crude vegetable oil and refined oil to 15% and 25% respectively in order to protect local farmers. Previously, India’s import tax on crude palm oil and refined palm-olein is at 7.5% and 15% respectively.

Inventory increased to 1.94m tones

Inventory as at August 2017 increased by 8.79% mom to 1.94m tonnes (yoy: +32.6%); the highest number since March 2016. The increase in inventory was due to higher stocks from both CPO and PPO (processed palm oil) which surged by 12.6% and 4.6% respectively to 1,056,571 tonnes and 885,430 tonnes during the period. Overall, higher inventory figure reflects the higher production albeit lower palm oil import of 41.66k tonnes compared to 52.96k tonnes in July 2017. We expect stock will continue this momentum in the next few months as production enters its peak-month in September and October, while demand growth continues to moderate. We predict stock level to range between 1.8m to 2.2m tonnes for the rest of 2017.

Average CPO price forecast at RM2,635/MT for 2017

We are revising our prediction that CPO price in 2H17 would trade within a range of RM2,400/MT – RM2,800/MT from RM2,200/MT – RM2,600/MT previously. So far, MPOB average CPO price for the period of July 2017 – September 8, 2017 has traded within a range of RM2,573/MT – RM2,760/MT; higher that our earlier prediction. Consequently, we revised upward our average CPO price 2017 target (but trailing behind 2016 average price of RM2,653/MT) to RM2,635/MT.

However, we still believe the current strength in CPO prices is unlikely to sustain in 2018. Hence, we maintain our average CPO price 2018 at RM2,550/MT. We do believe that the sustainability of the CPO price trend would very much depend on the magnitude of the depth and length of weather conditions that will impact palm and soybean production (supply concerns).

The 3-month CPO futures price in the month of August has trended upwards to trade within a range of RM2,574/MT to RM2,777/MT – mirroring the increase in SBO price from USD33.04/lb (Aug 15, 2017) to USD35.13/lb (Aug 24, 2017). CPO price for local delivery, i.e. MPOB’s CPO price for Aug 2017, increased slightly to 0.13% mom (yoy: +1.6%) to an average of RM2,633.00/MT against RM2,629.50/MT recorded in the previous month. For Jan-August 2017 period, the MPOB average CPO price stands at RM2,870/MT, up by RM377/MT or +15.1% against RM2,493/MT recorded in the same period last year – and 8.9% above our new 2017 average CPO price forecast of RM2,635/MT.

Maintain NEUTRAL

We maintain our Neutral recommendation on the plantation sector as we believe lower CPO price ahead will partly offset the production gain expected for 2017. We believe CPO price may not be sustainable at this level as prices are expected to soften in the later part of 2H17. We advise investors to accumulate plantation stocks if there is any pullback in share price.

Maintain HOLD on KLK (TP: RM26.46) and Batu Kawan (TP: RM20.39), IOIC (TP: RM4.74), IJMP (TP: RM3.06) and Sarawak Plant (TP: RM1.67) while BUY on Hap Seng (TP: RM2.89), TSH (TP: RM2.20) and GENP (TP: RM11.92). We have a Sell on FGV (TP: RM1.59) and a non-rated for TH Plant (TP: RM1.20).

Source: BIMB Securities Research - 11 Sept 2017