• Inventory declined 0.5% mom to 2.17m tonnes

• Palm oil exports fell 16% mom to 1.29m tonnes.

• CPO production dropped 2% mom to 1.53m tonnes.

• We revised our average 2018 CPO price projection lower to RM2,500/MT from RM2,600/MT. Maintain Neutral.

May’s closing stock eased to 2.17m tonnes.

Inventory as at May 2018 declined slightly by 0.5% mom to 2.17m tonnes; however this is still higher by 39.4% yoy. The lower mom inventory figure reflects the lower production and palm oil import of 32.26k tonnes compared to 35.62k tonnes in April 2018. We expect stock level to continue its downward momentum in June 2018, but expect the figures to remain above its psychological level of 2.0m tonnes up to July/August 2018 as demand growth moderates. The mom decrease in inventory was due to lower stocks of CPO which declined by 2.1% to 788.79k tonnes during the period –negating the increase of PPO of 768.57k tonnes (+1.4%)

Demand fell 16% mom

Palm oil export volume declined 15.7% mom to 1.291m tonnes vs. 1.530m tonnes recorded in Apr 2018 (-14.3% yoy) as India, EU and Pakistan registered lower demand. India registered the biggest drop of 74.9% followed by EU (-28.8%) and Pakistan by 9.0%. Total export value dropped 15% mom (26% yoy) to RM3.372bn.

Production dropped 2.1% mom.

Malaysia’s CPO production slipped 2.1% mom to 1.525m tonnes (-7.8% yoy) in May 2018 as harvesting activities is slower due to Ramadhan. The lower production was driven by lower output from all states except for Kedah, Perak and Sarawak that increased by 2.5%, 5.5% and 8.6% respectively to 19.1k tonnes, 149.9k tonnes and 342.99k tonnes. We expect monthly production to be slightly lower in June and start normalizing in 3Q18 before rising again in 4Q18 when sector moves into seasonally higher production peak month – probably in Sept and October. Total FFB production for the period of Jan-May 2018 improved by 5.35% yoy to 7.587m tonnes.

CPO price assumption lowered from RM2,600/MT to RM2,500/MT for 2018F

We are revising our prediction that CPO price for the remaining months will trade within a range of RM2,300/MT to RM2,700/MT from RM2,400/MT to RM2,800/MT previously; as we are taking conservative stance on crude palm oil’s pricing cycle. We now expect prices of CPO to average at RM2,500/MT for both year 2018 and 2019. So far, MPOB average CPO price for the period January 2018 to end-May 2018 has traded within a range of RM2,334/MT to RM2,556/MT – lower than our earlier prediction of RM2,400/MT to RM2,700/MT.

The 3-month CPO futures price in the month of May has been range-bound to close the month at RM2,429/MT (lowest in 3rd May: RM2,332/MT). On the other hand, CPO price for local delivery, i.e. MPOB’s CPO price for May 2018, fell slightly by 0.9% mom (yoy: -14.5%) to an average of RM2,396/MT against RM2,418/MT recorded in the previous month.

For Jan-May 2018 period, the MPOB average CPO price stands at RM2,443/MT, down by RM560/MT or -18.6% against RM3,003/MT recorded in the same period last year – and 2.3% below our new 2018 average CPO price forecast of RM2,500/MT.

Maintain NEUTRAL

We reiterate our Neutral recommendation on Plantation Sector. We do believe that the sustainability of the CPO price trend would very much depend on 1) weather conditions that will impact palm and soybean production (supply concerns); 2) downward revision of soybeans production estimates by USDA and Oil World; and 3) better-than-expected demand from major importing countries i.e. China, India and EU.Maintain Buy calls on SOP (TP: RM4.96) and GENP (TP: RM11.16) while Hold on HAPL (TP: RM2.48), KLK (TP: RM24.46), Batu Kawan (TP: RM20.39), IOIC (TP: RM4.80), IJMP (TP: RM2.14), TSH (TP: RM1.35), FGV (TP: RM1.77) and Sarawak Plantation (TP: RM1.48).

Source: BIMB Securities Research - 12 Jun 2018