• Inventory surged 12.4% mom to 2.49m tonnes

• CPO production rose 7.9% mom to 1.62m tonnes

• Palm oil exports dropped 8.1% mom to 1.10m tonnes.

• We are maintaining our average CPO price projection of RM2,380/MT for 2018. Maintain Neutral.

August closing stock rose to 2.49m tonnes.

Inventory as at August 2018 surged 12.4% mom to 2.49m tonnes; and maintained its high yoy increase of 28.2%. The higher inventory figure reflects the lower exports and higher palm oil import of 80.19k tonnes compared to 44.03k tonnes in July 2018. Notably, stocks of CPO and PPO (processed palm oil) increased by 3.3% and 23.6% respectively (CPO:+19.8% yoy; PPO:+38.2% yoy) to 1.265m tonnes and 1.224m tonnes during the period. We expect stock level to remain above its psychological level of 2.4m tonnes up to October/November 2018 as demand growth moderates and production is expected to increase.

Export fell 8.1% mom

Palm oil export volume for August declined 8.1% mom to 1.099m tonnes vs. 1.197m tonnes recorded in July 2018 (-26.1% yoy) as EU, Pakistan and China registered lower demand. The EU registered the biggest drop of 49% followed by Pakistan (-27%) and China by 0.03%. Total PO export value dropped 11% mom (-36% yoy) to RM2.72bn.

We are of the view that PO demand for the remaining months is expected to be moderate, which is likely to be affected by 1) ample supply and high stock level of soybean from US, Brazil and Argentina; 2) increased PO supply especially from Indonesia; and 3) weak demand from India due to its high import taxes and weak rupee.

Production increased 7.9% mom.

Malaysia’s CPO production increased 7.9% mom to 1.622m tonnes in August 2018 as sector moves into the seasonally higher production month; but lags behind last year’s production by -10.4%. All states in Malaysia (except Perak and Negeri Sembilan) recorded higher mom production, led by Kelantan which surged by 15.4% mom to 21.8k tonnes, followed by Sarawak (+14.7%), Terengganu (+10.8%), Pahang (+10.6%) and Johor (9.3%). However, on yoy basis, almost all states in Malaysia registered a negative production growth, lagging behind last year’s production number except for Sarawak, which recorded a growth of 3.6% yoy to 406.6k tonnes. Although CPO production for the period Jan-Aug 2018 fell 2.50% yoy to 12.045m tonnes, we expect production would catch-up and start to peak in the month of October /November. Hence, we maintain our forecast that CPO production would reach 20.08m tonnes for this year (+0.9%)

CPO price assumption of RM2,380/MT for 2018 maintained.

The 3-month CPO futures price in the month of August has been range-bound to close the month at RM2,248/MT (lowest in 2nd Aug: RM2,191/MT). On the other hand, CPO price for local delivery, i.e. MPOB’s CPO price for Aug 2018, fell by 1.4% mom (yoy: -17.1%) to an average of RM2,184/MT against RM2,215/MT recorded in the previous month.

For Jan-Aug 2018 period, the MPOB average CPO price stands at RM2,367/MT, down by RM504/MT or -17.5% against RM2,870/MT recorded in the same period last year – and 0.5% below our 2018 average CPO price forecast of RM2,380/MT.

As there is no strong catalyst expected to boost CPO price, we predict that CPO price for the remaining months will trade within a range of RM2,200/MT to RM2,300/MT. Although there were concerns on weak demand of PO, higher supply of soybean and PO, as well as the escalating trade tension between the US and China, we believe the downside for CPO price is limited; as long as crude oil trade above USD70/barrel and SBO price to above USD28 cents/lb, in our view. Hence, we maintain our forecast of CPO to average at RM2,380/MT for 2018 and RM2,450/MT for 2019.

Maintain NEUTRAL

We reiterate our Neutral recommendation on the plantation sector. Maintain Buy calls on SOP (TP: RM3.23) and GENP (TP: RM10.50) while Hold on HAPL (TP: RM2.25), KLK (TP: RM25.50), Batu Kawan (TP: RM19.05), IOIC (TP: RM4.55), TSH (TP: RM1.20), and FGV (TP: RM1.60). We have Sell on IJMP (TP: RM1.70) and Sarawak Plantation (TP: RM1.41) whilst Non-Rated for THP.

Source: BIMB Securities Research - 12 Sept 2018