CPO production continued to improve in April, up by 0.7% yoy to 1.56m MT. But, exports of palm oil increased by a higher 20% yoy as buyers like the EU, China, Pakistan and India bought more palm oil products. The increase in exports and consumption contributed to the lower April palm oil inventory of 2.17m MT, the lowest inventory level in the past 7 months. 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 April Production Up by 0.7% Yoy to 1.56m MT

Malaysia’s CPO production in April increased by 0.7% yoy to 1.56m MT due to an improvement after the lagged effect of the El Nino phenomenon that badly affected production in 2016. However, on a mom basis, production was lower by 1% in April, due to weaker production in Peninsular and Sabah but partially mitigated by higher production in Sarawak. CPO production in the Peninsular and Sabah declined by 4.4% and 1.7% mom, respectively, to 0.82m MT and 0.42m MT, while CPO production in Sarawak increased by 10.5% yoy to 0.32m MT. For 4M18, total CPO production increased by 9.3% yoy to 6.06m MT. We expect Malaysia’s CPO production to improve from May 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: 20.8m MT).

Stock Level Declines for the Fourth Consecutive Month to 2.17m MT

Palm-oil exports improved in April by 20.1% yoy to 1.54m MT, ahead of the reinstatement of export tax as well as Ramadhan in May. Selected key buyers including China, India, Pakistan and the EU bought more of Malaysia’s palm oil products, increasing by 6.2%, 86.4%, 158.1% and 16.9% yoy, respectively, to 146k MT, 300k MT, 141k MT and 191k MT. For 4M18, total exports have increased by 20% yoy to 5.93m MT. The increase in palm oil exports and consumption has resulted in inventory declining for the fourth consecutive month to 2.17m MT in April. 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.

4M18 CPO ASP at RM2,448/MT

Average MPOB locally-delivered CPO prices in April declined by RM8.50/MT mom to RM2,418/MT (Apr17 CPO ASP: RM2,752.50/MT). 4M18 CPO ASP averaged at RM2,448/MT vs. RM3,025.50/MT for 4M17. The next event to watch out for is the public hearing on the Trump administration’s proposed tariffs on US$50bn of Chinese goods on 15-17 May. 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.

ENSO-neutral Is Favoured Through Sept-Nov 2018

Based on the latest US NOAA climate advisory report, the tropical Pacific has returned to ENSO-neutral. The neutral condition is likely to continue through Sept-Nov 2018.

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 (FGV); 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 management is more focused on improving the core business, improving operational excellence and optimizing financial and human capital.

Key Risks for the 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) a 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 - 14 May 2018