Rises in August Production and Inventory

Malaysia’s CPO production increased in August by 7.9% mom to 1.62m MT, while exports decreased by 8.1% mom to 1.1m MT as some key buyers bought less of Malaysia’s palm oil products. Thus, the palm oil inventory level in August increased to 2.5m MT as production exceeded exports. Overall, we maintain our NEUTRAL plantation sector rating. Our top pick for the sector is Genting Plantation.

CPO Production in August Up 7.9% Mom to 1.62m MT

Malaysia’s CPO production increased for a second straight month in August, rising by 7.9% mom to 1.62m MT. FFB yield also improved across Peninsular Malaysia, Sabah and Sarawak, rising by 8.7%, 3.2% and 12.6% yoy respectively to 1.38 MT/ha, 1.28 MT/ha and 1.52 MT/ha. For 8M18, total CPO production was down by 2.5% yoy to 12.04m MT. We expect Malaysia’s CPO production to continue to improve in the next few months and peak in October/November, and we think that the 2018 production is likely to be slightly lower than 2017’s total CPO production of 19.92m MT.

Inventory Rises as Exports Decline 8.1% Mom

Palm oil exports in August decreased by 8.1% mom (-26% yoy) to 1.1m MT. This was the lowest level seen since February 2016 as key buyers such as Iran, the Philippines, Turkey, Pakistan and the EU bought less of Malaysia’s palm oil products. Nevertheless, this was slightly offset by higher palm oil exports to India, Vietnam and the US. Exports to Iran, the Philippines, Turkey, Pakistan and the EU were down 70.5%, 14.5%, 47.1%, 27.3% and 49% respectively while exports to India, Vietnam and the US rose by 5.8%, 12.1% and 44.7% mom, respectively, to 139k MT, 50k MT and 47k MT. For 8M18, total exports were down by 1.8% yoy to 10.5m MT. The palm oil inventory in August went up for a third consecutive month, up by 12.4% mom to 2.49m MT, as production exceeded exports.

8M18 CPO ASP at RM2,363/MT (-17.3% Yoy)

Average MPOB locally-delivered CPO prices in August stood at RM2,183.50/MT, down by 1.4% mom (Aug17: RM2,633/MT). For 8M18, CPO prices averaged RM2,363/MT vs. RM2,859/MT for 8M17. We expect CPO prices to trade higher than the current levels of RM2,200-2,250/MT, as we think demand should pick up towards 4Q18, underpinned by exports and domestic consumption by 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, which can cause major disruption to the world’s agricultural production and supply. Based on the US NOAA climate advisory report, there is a 60% chance for El Nino to make an appearance during the fall and this 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 a 2018 average CPO price of RM2,350/MT (2017 CPO ASP: RM2,783/MT). Our CPO ASP assumptions for 2019-20 are RM2,400/MTRM2,500/MT. Without any clear re-rating catalyst for the sector, 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 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 Sept 2018