Malaysia’s September CPO production increased by 14.4% mom and 4.1% yoy to 1.85m MT, while exports surged by 47.2% mom and 6.5% yoy to 1.62m MT as major players, especially India and the EU, bought more of Malaysia’s palm oil products. Given that the palm oil consumption is below the production level, palm oil inventories increased to 2.54m MT, which is the highest level since January of this year. Overall, we maintain our NEUTRAL plantation sector rating. Our top pick for the sector is Genting Plantation.

September Production Up 14.4% Mom and 4.1% Yoy to 1.85m MT

Malaysia’s CPO production in September increased by 14.4% mom and 4.1% yoy to 1.85m MT, as FFB yields improved across Peninsular Malaysia, Sabah and Sarawak, rising by 18.1%, 19.5% and 12.4% mom respectively to 1.63 MT/ha, 1.53 MT/ha and 1.72 MT/ha. For 9M18, total CPO production is down by 1.7% yoy to 13.9m MT. We believe Malaysia’s CPO production this year will likely peak in October/November and the 2018 CPO production will likely be slightly lower than 2017’s total CPO production of 19.92m MT (Oil World forecast for Malaysia CPO production in 2018E: 19.8m MT).

Inventories Rise as Exports Still Below Production Level

Palm oil exports in September increased substantially by 47.2% mom and 6.5% yoy to 1.62m MT. This is the highest export level since August 2016, and is mainly attributable to key buyers such as India, the EU, Pakistan and Turkey. Exports to India, the EU, Pakistan, Iran and Turkey increased by 64%, 185%, 86%, 338% and 165% mom respectively, to 228.1k MT, 228.4k MT, 104.9k MT, 84.4k MT and 72.6k MT. The increase in exports is partially due to the zero export-duty rate on palm oil in September as CPO prices fell below the RM2,250/MT threshold (August export-duty rate: 4.5%), which has helped to stimulate export demand. Meanwhile, exports to China declined slightly by 1.5% mom to 110k MT. For 9M18, Malaysia’s total palm oil exports declined by 0.7% yoy to 12.15m MT. Given that the palm oil consumption is still below the production level, palm oil inventories in September continued to rise for the fourth straight month, increasing by 1.4% mom to 2.54m MT – the highest inventory level since January 2018.

9M18 CPO ASP at RM2,338/MT (-17.9% Yoy)

Average MPOB locally-delivered CPO prices in September stood at RM2,177.50/MT, down marginally mom by RM6/MT (Sep17 CPO ASP: RM2,780.50/MT). For 9M18, the average CPO price was RM2,338/MT vs. RM2,848/MT for 9M17. We expect CPO prices to trade higher than current levels of about RM2,100/MT, as we think global production growth for palm oil is likely to slow down towards year-end with the monsoon season. We expect demand to remain healthy going forward, underpinned by exports and domestic consumption for the food and energy industries.

Rising Chances for El Nino to Make An Appearance

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, the tropical Pacific has remained ENSO-neutral. However, there is a 50-55% chance for a transition to El Nino by fall and rising to a c. 65-70% possibility by winter.

Maintain Our NEUTRAL Sector Call and Stock Recommendations

Factoring in a CPO ASP of RM2,100-2,400/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 RM2,400-2,500/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 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 the 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 - 11 Oct 2018