Affin Hwang Capital Research Highlights

Plantation - Production, Exports and Inventory Rise in July

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Publish date: Mon, 13 Aug 2018, 08:46 AM
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This blog publishes research highlights from Affin Hwang Capital Research.

Production, Exports and Inventory Rise in July

Malaysia’s CPO production increased in July by 12.8% mom to 1.5m MT, after declining for the past three months, as plantation workers returned after their Hari Raya break. Exports increased by 6.8% mom to 1.2m MT as key buyers like the EU and Iran bought more of Malaysia’s palm oil products. The palm oil inventory level in July increased slightly to 2.2m MT as the growth rate in production exceeded that for exports. Overall, we maintain our NEUTRAL plantation sector rating. Our top sector pick is Genting Plantation.

July CPO Production Up 12.8% Mom to 1.5m MT

Malaysia’s CPO production rebounded in July by 12.8% mom to 1.5m MT, after three months of consecutive decline, as plantation workers returned from their Hari Raya holidays. The FFB yield also improved across Peninsular Malaysia, Sabah and Sarawak, rising by 11.3%, 5.1% and 10.7% yoy respectively to 1.28 MT/ha, 1.24 MT/ha and 1.34 MT/ha. For 7M18, total CPO production was down by 1.1% yoy to 10.4m MT. Nevertheless, we expect Malaysia’s CPO production to improve in the remaining months of the year and for the total production in 2018 to reach above the 20m MT level (2017: 19.92m MT) for the first time.

Inventory Rises as Exports Grew at a Lower Rate Than Production

Palm oil exports in July increased by 6.8% mom to 1.21m MT. This is also the first increase over the past three months, as key buyers including the EU and Iran bought more of Malaysia’s palm oil products. But, this was partially offset by lower palm oil exports to China, India and Pakistan. Exports to the EU and Iran were up by 16.2% and >100% mom respectively to 157.2k MT and 65.3k MT, while exports to China, India and Pakistan dropped by 28.2%, 17.7% and 21.3% mom, respectively to 111.8k MT, 131.5k MT and 77.7k MT. For 7M18, total exports were still up by 2.2% yoy to 9.44m MT, partly due to the suspension of export tax on palm oil by the Malaysian Government for the first four months of 2018, which increased demand. Given that the palm oil production growth rate was stronger than the export growth rate, the palm oil inventory level in July went up for a second month, rising by 1.3% mom to 2.21m MT.

7M18 CPO ASP at RM2,393.50/MT (-17.3% Yoy)

The average MPOB locally-delivered CPO price in July stood at RM2,215/MT, down by 4.7% mom (July17 CPO ASP: RM2,629.50/MT). For 7M18, the CPO price averaged at RM2,393.50/MT vs. RM2,895/MT for 7M17. We expect CPO prices to trade higher than the current level of RM2,250/MT, as we think demand would pick up towards 4Q18 underpinned by exports and domestic consumption in the food and energy industries.

El Nino Could Make An Appearance Towards Year-end

The El Niño-Southern Oscillation (ENSO) cycle can greatly influence the global weather, as these cycles can alter the normal weather patterns and surface temperatures, causing major disruption to the world’s agricultural production and supply. Based on the US NOAA climate advisory report, the tropical Pacific has remained ENSO-neutral. The neutral condition is likely to continue through summer 2018. Thereafter, there is a 65% chance for El Nino to make an appearance during the fall and this possibility rises to c. 70% by winter 2018/19.

Maintain NEUTRAL Sector Rating and Stock Calls

Factoring in a CPO ASP of RM2,100/MT-RM,2,400/MT in 2H18, we forecast the 2018 average CPO price to be at RM2,350/MT (2017 CPO ASP: RM2,783/MT). Our CPO ASP assumptions for 2019-20E are RM2,400/MT-RM2,500/MT. We maintain our NEUTRAL sector rating. We make no changes to our earnings forecasts for the plantation companies we cover. Across Affin’s coverage universe, we have a BUY rating on Genting Plantation; HOLD ratings on FGV, KL Kepong, SD Plantation, Ta Ann and Jaya Tiasa; and SELL ratings on IJM Plantation, Hap Seng Plantation, IOI Corp and WTK (please refer to the peer comparison table on page 1). For plantation-sector exposure, we like Genting Plantation. as we expect higher FFB and CPO production coupled with an increase in contribution from the downstream plantation segment to drive earnings growth going forward.

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 - 13 Aug 2018

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