Palm oil inventory resumed on uptrend, rising by 1.3% MoM to 3.05m tonnes in Feb-19, as seasonally lower output was more than offset by lower exports and domestic disappearance. We maintain our average CPO price assumptions of RM2,300/tonne for 2019 and RM2,400/tonne for 2020 (2018: RM2,235/tonne). While exports will likely improve from Mar-19 onwards (as palm oil exports typically improve when winter season nears end), this would likely be offset by seasonally higher palm output, resulting in gradual drawdown in palm inventory, hence capping near-term CPO price upside. Maintain our UNDERWEIGHT stance on the sector.

DATA HIGHLIGHTS

Stockpile resumed on uptrend. Palm oil inventory resumed on uptrend, rising by 1.3% MoM to 3.05m tonnes in Feb-19, as seasonally lower output was more than offset by lower exports and domestic disappearance. Against consensus, the stockpile came in higher than Bloomberg consensus estimate of 2.95m tonnes, as lower-than expected output (1.54m tonnes vs. consensus estimate of 1.6m tonnes) was more than offset by lower-than-expected exports (1.32m tonnes vs. consensus estimate of 1.43m tonnes).

Output declined for the 4th consecutive month … By 11.1% to 1.54m tonnes in Feb-19, due mainly to seasonal effect (historically, palm output eases for 4-5 months after reaching its peak in Sep-Oct). On YoY basis, output rose 15% to 1.54m tonnes in Feb-19, in the absence of lingering effect of El Nino.

Exports eased in Feb-19… By 21.4% MoM to 1.32m tonnes, as higher exports to India (+41%) was more than negated by lower exports to China (-74.8%) and EU (- 22.3%).

HLIB’s VIEW

Forecast. We maintain our average CPO price assumptions of RM2,300/tonne for 2019 and RM2,400/tonne for 2020 (2018: RM2,235/tonne). While exports will likely improve from Mar-19 onwards (as palm oil exports typically improve when winter season nears end), this would likely be offset by seasonally higher palm output, resulting in gradual drawdown in palm inventory, hence capping near-term CPO price upside.

4Q18 results roundup – still a disappointing quarter… With 2/3 of the plantation companies which HLIB tracks reported weaker-than-expected results, due to lower than-expected realised blended palm product prices and FFB production. During the quarterly results review, we lowered our net profit forecasts for CBIP and Sime Darby Plantations, and raised our core net loss forecasts for IJM Plantations. Correspondingly, TPs of the abovementioned companies were also adjusted. We downgraded our ratings on CBIP, FGV, Hap Seng Plantations and IOI, as valuations have become excessive following the recent share price run-ups and our downward core net profit adjustments (see page #3 for quarter results roundup).

Maintain UNDERWEIGHT. We believe pricey valuations (following recent share price appreciation of most plantation companies) will cap near-medium term share price performances of plantation players.

Source: Hong Leong Investment Bank Research - 12 Mar 2019