Malaysian CPO production declined for the second consecutive month in September, underpinned by lower CPO production recorded across all regions. Meanwhile, palm-oil exports increased further by 1.8% mom as key buyers such as China, Pakistan, the Philippines and Turkey bought more. Inventory of palm oil increased to 2.02m MT, equivalent to 1.3 months of export, which is manageable in our view. We still maintain our NEUTRAL plantation sector rating with GENP as our top pick.

CPO Production Declined by 1.7% Mom, But 9M17 Up 12.2% Yoy

CPO production in Malaysia declined for the second consecutive month in September, declining by 1.7% mom to 1.78m MT (August: -0.9% mom). CPO production was lower across all regions, whereby Peninsular, Sabah and Sarawak saw their CPO production falling by 1%, 2% and 2.9% mom, respectively, to 0.97m MT, 0.43m MT and 0.38m MT. For 9M17, total CPO production is nevertheless up by 12.2% yoy to 14.13m MT. This accounts for about 72.5% of Oil World’s 2017 forecast production of 19.5m MT. The recovery is largely anticipated, post the 2015-16 El Nino phenomenon which badly affected 2016 production. We believe that production, on a MoM basis, is likely to improve and peak in October before slowing down towards year-end.

Inventory Rises Above 2.0m MT

Palm-oil exports increased further in September by 1.8% mom to 1.52m MT, ahead of the Mid-Autumn and Deepavali festivities. Among the key buyers, exports to China, Pakistan, the Philippines and Turkey rose by 41.6%, 87.7%, 2.8% and 35% MoM, respectively, to 275.2k MT, 127.9k MT, 63.1k MT and 94.9k MT. For 9M17, total exports have increased by 2.2% yoy to 12.23m MT. As palm-oil exports in September still fell below production numbers, palm-oil inventory increased further by 4% mom to 2.02m MT, the highest level over the past 19 months (September 2016 inventory: 1.55m MT). The current stock level is equivalent to 1.3 months of export, which is still sufficient and manageable, in our view.

Soybean-oil Premium Narrows

For September, the average MPOB locally delivered CPO price was higher at RM2,780.50/MT, increasing by 5.6% mom from RM2,633/MT in August (September 2016 CPO ASP: RM2,862/MT), bringing the 9M17 CPO ASP to RM2,848/MT. Due to the steeper increase in CPO prices compared to the increase in soybean-oil prices for September, the soybean-oil premium over CPO narrowed to about US$158/MT (from US$181/MT in August).

La Nina Back in the Picture

Based on the latest US NOAA climate advisory report, the sea surface temperatures in the key monitoring region of the tropical Pacific have been dropping through the summer. Hence, the chances of La Nina developing this fall and winter is now higher at 55-60% odds.

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, RM10.50) and Ta Ann (TAH MK, RM3.63); HOLD ratings on KL Kepong (KLK MK, RM24.78), Felda Global (FGV MK, RM1.76), Sime Darby (SIME MK, RM9.14), IJM Plantation (IJMP MK, RM2.86), Hap Seng Plantation (HAPL MK, RM2.70) and Jaya Tiasa (JT MK, RM1.07); while IOI Corp (IOI MK, RM4.52) and WTK (WTKH MK, RM0.75) carry SELL ratings (please refer to our peer comparison table above).

For plantation-sector exposure, GENP is still our top sector pick. We continue to like GENP as we expect rising matured plantation areas 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-thanexpected 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 - 11 Oct 2017