Malaysia’s CPO production in October increased by 6% mom to 1.96m MT, while exports declined by 3% mom to 1.57m MT as major players such as India, the EU and Turkey bought less of Malaysian palm oil products. Given that palm oil consumption in October was below the production level, the palm oil inventory increased further to 2.72m MT, which is the highest level since December 2017. Overall, we maintain our NEUTRAL rating on the plantation sector. Our top sector pick is still Genting Plantation.

October Production Up 6% Mom to 1.96m MT

Malaysia’s CPO production in October increased by 6% mom to 1.96m MT. This is the highest monthly CPO production over the past 12 months as production improved in Peninsular Malaysia and Sabah, rising by 5.7% and 15.1% mom respectively to 1.01m MT and 0.5m MT. Meanwhile, CPO production in Sarawak fell by 2.1% mom to 0.45m MT. For 10M18, total CPO production was lower by 1.7% yoy at 15.9m MT. We think Malaysia’s CPO production could potentially slow down over the next few months as we enter the monsoon period and that 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).

Inventory Increases Further to 2.7m MT, Highest Since December 2017

Palm oil exports in October declined by 3% mom to 1.57m MT, mainly attributable to key buyers such as India, the EU and Turkey, which bought less of the palm oil products. Exports to India, the EU and Turkey declined by 56.5%, 27.2% and 25.1% mom respectively, to 99.3k MT, 166.2k MT and 54.4k MT. Meanwhile, exports to China and Iran climbed up by 94.2% and 51.8% mom respectively, to 213.6k MT and 128.1k MT. For 10M18, Malaysia’s total exports of palm oil dipped marginally by 0.4% yoy to 13.72m MT. Given that consumption of palm oil was still below the production level, the palm oil inventory in October increased for the fifth consecutive month, rising by 7.6% mom to 2.72m MT. This is the highest inventory level since December 2017.

10M18 CPO ASP at RM2,303.50/MT (-18.7% yoy)

Average MPOB locally-delivered CPO prices in October stood at RM2,082/MT, down by 4.4% mom (Oct17 CPO ASP: RM2,736/MT). For 10M18, the CPO price averaged at RM2,303.50/MT vs. RM2,832/MT for 10M17. Prices of vegetable oils, including CPO, have been under pressure with the improvement in global production coupled with the on-going trade tensions between the US and China. Nevertheless, we still expect CPO prices to trade higher than the current level of about RM1,900/MT, underpinned by higher consumption in the energy sector and the food industries.

Rising Chances for El Nino to Occur, But Likely to be Mild

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, clearer signs of the development of El Nino are starting to be seen. Forecasters estimate that El Nino conditions will develop in the next few months with a c.70-75% possibility that El Nino will be present through the winter. Currently, it is predicted to be a mild El Nino event.

Maintaining Our NEUTRAL Call on the Sector and Stock Recommendations

Across our coverage universe, we have a BUY rating on Genting Plantation; HOLD ratings on FGV, KL Kepong, IOI Corp, SD Plantation, Ta Ann and Jaya Tiasa; and SELL ratings on IJM Plantation, Hap Seng Plantation 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 Nov 2018