• Inventory inched up 0.83% mom to 2.19m tonnes

• CPO production fell 13% mom to 1.33m tonnes

• Palm oil exports dropped 13% mom to 1.13m tonnes.

• We revised our average 2018 CPO price projection lower to RM2,380/MT from RM2,500/MT. Maintain Neutral.

June’s closing stock inched up to 2.17m tonnes.

Inventory as at June 2018 increased slightly by 0.8% mom to 2.19m tonnes; and maintained its high yoy increase of 43.3%. The higher inventory figure reflects the lower exports and higher palm oil import of 85.89k tonnes compared to 32.26k tonnes in May 2018. As such, stocks of CPO increased by 4.4% (+53% yoy) to 1.22m tonnes during the period – however, PPO stocks dropped 3.3% to 971.79k tonnes (+33% yoy) as at end June 2018. We expect stock level to remain above its psychological level of 2.0m tonnes up to September/October 2018 as demand growth moderates and production expected to increase.

Export fell 13% mom

Palm oil export volume declined 12.6% mom to 1.129m tonnes vs. 1.291m tonnes recorded in May 2018 (-18.2% yoy) as China, Pakistan and EU registered lower demand. Pakistan registered the biggest drop of 23.3% followed by China (-19.4%) and EU by 0.6%. Total PO export value dropped 14% mom (29% yoy) to RM2.917bn.

Production dropped 13% mom.

Malaysia’s CPO production slipped 12.6% mom to 1.333m tonnes (-12.0% yoy) in June 2018 as harvesting activities were slower during Ramadhan and Aidil Fitri celebration. All states in Malaysia recorded lower production, led by Negeri Sembilan which dropped by 21% mom to 49.3k tonnes, followed by Pahang (-18.2%), Kelantan (-16.4%), Terengganu (-13.8%) and Sabah (-13.6%. We expect monthly production to 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-June 2018 improved by 2.3% yoy to 8.92m tonnes – making up 44% of our full year forecast of 20.10m tonnes.

CPO price assumption lowered from RM2,500/MT to RM2,380/MT for 2018F

We are revising our prediction that CPO price for the remaining months will trade within a range of RM2,200/MT to RM2,550/MT from RM2,300/MT to RM2,700/MT previously; as we are taking a more conservative stance on CPO pricing trend. We now expect prices of CPO to average at RM2,380/MT for 2018 and RM2,450/MT for 2019. So far, MPOB average CPO price for the period January 2018 to end-June 2018 has traded within a range of RM2,231/MT to RM2,556/MT – lower than our earlier prediction of RM2,300/MT to RM2,700/MT.

We still believe that the major catalyst for CPO price movement is Soybean Oil (SBO) price direction. Due to the US-China trade tension, 3-month SBO futures price is currently trading below USD 30.18 cents/lb, which is below 1-Std Deviation from its 5-years average of USD 34.51 cents/lb. Price of SBO dropped below USD 30.0 cents/lb on 15 June 2018, when Beijing would begin imposing 25% tariffs on Soybean as a retaliation against US new tariffs. At the local front, CPO price (local delivery) begin to drop below RM2,300/MT on 19 June 2018 to close the month of June at RM2,295/MT.

The 3-month CPO futures price in the month of June has been range-bound to close the month at RM2,326/MT (lowest in 21st June: RM2,251/MT). On the other hand, CPO price for local delivery, i.e. MPOB’s CPO price for June 2018, fell by 3.0% mom (yoy: -13.5%) to an average of RM2,324/MT against RM2,396/MT recorded in the previous month.

For Jan-June 2018 period, the MPOB average CPO price stands at RM2,423/MT, down by RM527/MT or -17.9% against RM2,950/MT recorded in the same period last year – and 1.8% above our new 2018 average CPO price forecast of RM2,380/MT.

Maintain NEUTRAL

We reiterate our Neutral recommendation on Plantation Sector. Lack of positive catalyst would dampened further CPO price moving forwards, aided with 1) weaker soybean oil prices and excess supply of global vegetables oil; 2) higher cost of production – i.e. wages and fertilisers; and 3) soft palm oil demand from major importing countries i.e. China, India and EU.

At this juncture, we are maintaining our Recommendation and TP of all stocks under our coverage pending our upcoming individual company reports. 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 - 11 Jul 2018