Exports lower than production for third month

Palm oil inventories in November were 1.66m MT, the highest level in the past 4 months, as exports came in below production. The drop in production was partly due to the last El Niño effect, while exports were lower as key importers like India and EU bought less palm oil. The soybean oil premium narrowed in November as CPO prices rose higher than soybean oil prices. We maintain our sector NEUTRAL rating and stock target prices.

November CPO output declines 4.8% yoy to 1.57m MT

CPO production in November declined by 4.8% yoy to 1.57m MT, the lowest output for the month of November since 2010, as FFB yields dropped in Sabah and Sarawak partly due to the last El Niño effect. FFB yields for Sabah declined by 14.4% to 1.54 MT/ha and those for Sarawak declined by 7.9% yoy to 1.28 MT/ha, while FFB yields in Peninsular Malaysia were flat at 1.52 MT/ha. Total CPO production in 11M16 amounted to 15.8m MT, down 14.6% yoy and accounting for approximately 89% of Oil World’s 2016 forecast of 17.8m MT.

Exports fall 8.6% yoy as key buyers such as India and EU buy less

While CPO production has been trending lower since October, palm oil exports have also remained weak, falling by 8.6% yoy in November to 1.37m MT, as selected key importers bought less. Exports to India declined by 66.3% yoy and those to the EU declined by 24.6% yoy. In 11M16, palm oil exports declined by 7.4% yoy to 14.8m MT. Palm oil inventory in November was 1.66m MT (Oct-16: 1.57m MT; Nov-15: 2.91m MT), the highest level in the past 4 months.

Premium narrows as CPO price rises more than that of soybean oil

MPOB locally delivered CPO prices strengthened from RM2,720/MT in October to RM2,885/MT in November (11M16 CPO ASP: RM2,607/MT), and remained above RM3,100/MT for the first 2 weeks of December. Based on current trends, we think CPO prices may average RM2,650/MT for this year. A sizable increase in CPO prices occurred in November, which was more than the increase in soybean oil prices; hence the soybean oil premium has narrowed to US$129/MT.

Weak La Niña still present; December production likely to be lower

According to the latest US NOAA advisory report, La Niña conditions are still present with negative SST anomalies present across most of the central and eastern equatorial Pacific. The weak La Niña conditions are likely to continue, with a transition to ENSO (El Niño Southern Oscillation) neutral favoured during the January-March 2017 period. In December, we expect production to be seasonally lower on a mom basis. After a slowdown in production in 2016 due to the El Niño effect, we believe production will likely rebound in 2017.

Maintain NEUTRAL sector rating and stock calls

We maintain our plantation stock target prices and sector NEUTRAL rating. In terms of stock picks, we still do not have any BUY-rated names in our coverage universe. We have SELL ratings on FGV, GENP and SIME on valuation grounds, while IOI, KLK, IJMP and HAPL continue to be rated HOLD.

Key risks

Key downside risks to our plantation sector NEUTRAL rating and stock calls include: (i) weaker-than-expected demand and higher-than expected production lowering prices of vegetable oils; (ii) declines in CPO production that are not offset by higher CPO selling prices; (iii) delays in the implementation of biodiesel mandates in Indonesia and Malaysia; and (iv) unfavourable policies and taxes. Key upside risks include a strong rebound in the global economy as well as demand and prices of vegetable oils.

Source: Affin Hwang Research - 15 Dec 2016