CPO production in August decreased slightly mom on the back of lower production from the Peninsular and Sabah regions. Meanwhile, exports of palm oil increased for the second consecutive month by 6.4% mom as key buyers like Iran, India, Philippines and China bought more palm oil products. Inventory of palm oil in August increased to 1.94m MT, the highest level since March 2016. Overall, we maintain our NEUTRAL plantation sector rating with GENP as our top pick.

August Production Slipped by 0.9% Mom, But Ytd Up 14% Yoy

Malaysian CPO production decreased slightly by 0.9% mom to 1.81m MT in August after a strong rebound in July. CPO production in the Peninsular and Sabah fell by 0.7% and 5.3% mom, respectively, to 0.98m MT and 0.44m MT, but this was partially mitigated by a 3.8% mom increase in Sarawak’s production to 0.39m MT. Peninsular Malaysia and Sarawak recorded higher FFB yield of 1.74 MT/ha (+3.6% mom) and 1.55 MT/ha (+5.4% mom), while Sabah recorded lower FFB yield of 1.5 MT/ha (-7.4% mom). For 8M17, total CPO production rose by 13.6% yoy to 12.35m MT. The recovery was largely anticipated after the 2015-16 El Nino phenomenon badly affected production in 2016.

Palm Oil Inventory at 1.94m MT, Highest Level Since March 2016

Palm oil exports increased for a second consecutive month by 6.4% mom in August to 1.49m MT. Among the key buyers, exports to Iran, India, Philippines and China rose by 330.2%, 13.5%, 7.3% and 2.9% mom, respectively, while exports to the EU, Vietnam, USA and Pakistan fell by 17.2%, 15.9%, 13.3% and 11.9% mom, respectively. For 8M17, total exports has increased by 2.0% yoy to 10.71m MT. Palm oil inventory in August rose by 8.8% mom to 1.94m MT, the highest level over the past 18 months (Aug16 inventory: 1.46m MT). The current stock level is equivalent to 1.3 months of export, which is sufficient and manageable, in our view.

Soybean Oil Premium Over CPO Widens Further in August

For August, the average MPOB locally-delivered CPO prices was higher at RM2,633/MT, up marginally by 0.1% mom from RM2629.50/MT in July (August16: RM2,602/MT; 8M17 CPO ASP: RM2,859/MT). Due to the steeper increase in soybean-oil prices compared to increase in CPO prices for August, the soybean oil premium over CPO widened to about US$181/MT, up US$9/MT mom.

ENSO Neutral Favoured for Remaining of 2017

Based on the latest US NOAA climate advisory report, overall, the ocean and the atmosphere system remained consistent with ENSO-neutral. Most models favour ENSO-neutral through the remainder of this year. The chances of El Nino or La Nina making an appearance remains, but it is low.

Maintain NEUTRAL on Our Sector Rating and Stock Calls

No changes have been made to our plantation companies’ earnings forecasts. Across our coverage universe, we have BUY ratings on Genting Plantation (GENP MK, RM10.66) and Ta Ann (TAH MK, RM3.65); HOLD ratings on KL Kepong (KLK MK, RM24.74), Felda Global (FGV MK, RM1.71), Sime Darby (SIME MK, RM9.14), IJM Plantation (IJMP MK, RM3.05), Hap Seng Plantation (HAPL MK, RM2.63) and Jaya Tiasa (JT MK, RM1.03); while IOI Corp (IOI MK, RM4.53) and WTK (WTKH MK, RM0.77) carry SELL ratings (please refer to our peer comparison table). For plantation-sector exposure, GENP is our top sector pick. We continue to like GENP as we expect rising matured plantation area and higher FFB and CPO production to drive growth. Sector wise, we maintain our NEUTRAL rating for the plantation sector.

Key Risks

Key downside risks to our NEUTRAL rating on the plantation sector 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. Meanwhile, key upside risks include a strong rebound in the global economy as well as demand and prices of vegetable oils.

Source: Affin Hwang Research - 12 Sept 2017