• Production increased by 12.9% mom to 2.01m tonnes, the highest since Oct’15.
• Inventory inched up by 8.4% mom to 2.19m tonnes.

• Exports increased 2.0% mom to 1.55m tonnes from 1.52m tonnes in September.

• YTD production accounted 84% of our full year forecast.

• We maintain our average CPO price projection of RM2,700/MT for 2017. Neutral.

October’s CPO production hit 2.0m target.

Malaysia’s CPO production hits the 2.0m target, an increase of 12.86% mom to 2.009m tonnes (+19.73% yoy), in October 2017. The higher production was supported by higher output from all states except for Selangor which saw production declined by 2.3% mom to 46,343 tonnes. Kelantan recorded the largest increase of 20.8%, followed by Sabah 18.0%, Negeri Sembilan 17.5%, Pahang 15.9% and Johor by 13.4%. Total FFB production for the period of Jan-Oct 2017 improved by 13.12% yoy to 16.142m tonnes – accounting for 84% of our full year forecast. Although we expect monthly production to drop in November and December to 1.6m-1.8m tonnes, we maintain our forecast that CPO production would reach 19.28m tonnes this year (+11.3% yoy).

Demand continued to increase in October

Palm oil export volume increased 2.0% mom to 1.549m tonnes vs. 1.518m tonnes recorded in Sep 2017 (+7.84% yoy) as EU, Pakistan and Vietnam, registered higher mom demand – with EU registering a jump of 84.6% whilst Vietnam and Pakistan increased 43.1% and 6.8% respectively.

Inventory surged to 2.19m tonnes in October

Inventory as at October 2017 increased by 8.4% mom to 2.19m tonnes (yoy: +39.2%); the highest level since March 2016. The increase in inventory was due to higher stocks from both CPO and PPO (processed palm oil) which surged by 15.4% and 0.6% respectively to 1.231m tonnes and 959k tonnes during the period. Overall, higher inventory figure reflects the higher production and ending stocks albeit lower palm oil import of 13.48k tonnes compared to 41.17k tonnes in Sep 2017. We expect stock level will continue this rising momentum in the next few months as ending stocks trend higher and demand growth is expected to continue to moderate. We predict stock level to range between 1.9m to 2.2m tonnes for the rest of 2017.

Average CPO price forecast at RM2,700/MT for 2017

We are maintaining our forecast average CPO price of RM2,700/MT for 2017. We expect price to trade within a range of RM2,600/MT–RM2,800/MT for the rest of 2017. The 3-month CPO futures price in the month of October has trended higher to closed the month at RM2,815/MT. However, CPO price for local delivery, i.e. MPOB’s CPO price for Oct 2017, decreased slightly by 1.6% mom (yoy: +0.6%) to an average of RM2,736/MT against RM2,781/MT recorded in the previous month.

For Jan-October 2017 period, the MPOB average CPO price stands at RM2,848/MT, up by RM295/MT or +11.6% against RM2,553/MT recorded in the same period last year – and 5.5% above our 2017 average CPO price forecast of RM2,700/MT.

Maintain NEUTRAL

We maintain our Neutral recommendation on the plantation sector as we believe current CPO price may not be sustainable as production starts to increase and companies begin reporting bumper crops as yield fully recovers from the lag impact of EL-Nino. We recommend investors to accumulate plantation stocks if there is any pull-back 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 SOP (TP: RM5.87), 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

Source: BIMB Securities Research - 13 Nov 2017