CPO production continued to improve in March, up by 7.5% yoy to 1.57m MT. Exports were also stronger as key importers such as China, India and Pakistan bought more of Malaysian palm oil products. The increase in exports and consumption contributed to the lower March palm oil inventory of 2.32m MT, down from 2.48m MT in February 2018. We believe that the export tax suspension on palm oil by the Malaysian Government has stimulated demand for Malaysian palm oil products and contributed to the decline in the stock level. Overall, we maintain our NEUTRAL plantation sector rating and our CPO ASP assumption of RM2,600/MT for 2018E.

Malaysia’s March Production Up by 7.5% Yoy to 1.57m MT

Malaysia’s CPO production increased by 7.5% yoy to 1.57m MT due to an improvement after the lagged effect of the El Nino phenomenon that badly affected production in 2016. On a mom basis, production is up by 17.2% in March, due to seasonal factors and higher number of working days. CPO production in the Peninsular and Sabah increased by 11.1% and 10.7% yoy, respectively, to 0.86m MT and 0.43m MT, while CPO production in Sarawak dropped by 5.8% yoy to 0.29m MT. We expect Malaysia’s CPO production to continue to improve from April onwards and we expect 2018E production to reach above the 20m MT level (2017: 19.92m MT) for the first time (Oil World 2018 CPO production forecast: 20.76m MT).

Higher Exports Lowering Stock Level

Palm oil exports improved in March by 23.7% yoy to 1.57m MT ahead of the initial planned reinstatement of export tax in early-April. Selected key buyers including China, India and Pakistan bought more of Malaysia’s palm oil products, increasing by 29%, 130% and 112% yoy, respectively, to 134k MT, 395k MT and 116k MT. The increase in palm oil exports and consumption has resulted in inventory declining to 2.32m MT. We believe the suspension of export tax on palm oil by the Malaysian Government has helped stimulate export demand and contributed to the decline in the stock level. Take note that the Malaysian Government has extended the suspension of export tax on palm oil by another month to end-April 2018. This should further boost demand for palm oil products, help to lower inventory level ahead of Ramadhan as well as supporting CPO prices.

CPO ASP Lower Mom at RM2,426.50/MT

Average MPOB locally-delivered CPO prices in March declined by RM61.50/MT mom to RM2,426.50/MT (Mar17 CPO ASP: RM2,955.50/MT). While CPO prices in US$ strengthened in March, this was however negated by the appreciation of the RM against the US$ for the same period, partly contributing to the decline in CPO prices in RM terms. 1Q18 CPO ASP averaged at RM2,461.50/MT vs. RM3,126/MT for 1Q17. CPO prices did however improve slightly in the first week of April, after China hit back at the US, announcing a 25% tariff on soybeans. Given that CPO can be a substitute for soybean oil, we believe the Chinese tariffs on American soybean can be positive for palm oil producing countries.

Transitioning to ENSO-neutral

Based on the latest US NOAA climate advisory report, La Nina has decayed and returned to ENSO-neutral condition. The neutral condition is likely to continue into the second half of the year.

Maintain NEUTRAL on Our Sector Rating and Stock Calls

As we expect CPO production to continue to improve from 2018 onwards (barring no extreme weather condition hitting the palm oil producing countries), the supply of palm oil in the market could potentially improve and put downward pressure on CPO prices. As such, we maintain our CPO ASP assumption for 2018-19E at RM2,600/MT-2,500/MT. Sectorwise, we maintain our NEUTRAL rating. We make no changes to our earnings forecasts for the plantation companies we cover. Across our coverage universe, we have BUY ratings on Jaya Tiasa, Ta Ann and Felda Global; HOLD ratings on Genting Plantation, KL Kepong, SD Plantation, IJM Plantation and Hap Seng Plantation; and SELL ratings on IOI Corp and WTK (please refer to the peer comparison table on page 1). For plantation-sector exposure, FGV is our top pick as we believe earnings will grow on the back of higher FFB and CPO production as well as better contribution from the sugar business. We like FGV as we think management is focused on improving the core business, improving operational excellence and optimizing financial and human capital.

Key Risks for Plantation Sector

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) decline in CPO production that is 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 Apr 2018