Malaysia’s CPO production in November declined by 6.1% mom to 1.85m MT, partly due to the seasonal monsoon factor. Meanwhile, exports dropped by 12.9% mom to 1.38m MT as major buyers such as China, the EU, Pakistan and the Philippines bought less of Malaysian palm oil products. As palm oil exports and consumption in November were below production, palm oil inventory increased further to a record high of 3.0m MT. We believe the current CPO price pressure emanates from large palm oil stocks in Malaysia and Indonesia coupled with reserved consumer buying. Overall, we maintain our NEUTRAL rating on the plantation sector. Our top sector pick is Ta Ann.

Production in November Down 6.1% Mom to 1.85m MT

Malaysia’s CPO production in November declined by 6.1% mom and 5% yoy to 1.85m MT. Production in Peninsular Malaysia and Sarawak declined by 5.6% and 15.7% mom respectively to 953.8k MT and 375.9k MT. Meanwhile, CPO production in Sabah increased by 1.4% mom to 515.6k MT. For 11M18, total CPO production was lower by 2.1% yoy at 17.7m MT. We think Malaysia’s CPO production could potentially slow down over the next few months due to the seasonal monsoon period. CPO production in 2018E will likely be slightly lower than the 19.92m MT in 2017 (Oil World forecast for Malaysia’s CPO production in 2018E: 19.5m MT).

Exports Declined as Some Key Buyers Bought Less Palm Oil Products

Palm oil exports declined in November by 12.9% mom to 1.38m MT, mainly attributable to key buyers such as China, the EU, Pakistan and the Philippines buying less palm oil products. Exports to China, the EU, Pakistan and the Philippines declined by 20.9%, 11.4%, 19.7% and 11.5% mom respectively, to 172.9k MT, 148.8k MT, 84.k MT and 64.1k MT. Meanwhile, exports to India climbed up >100% mom to 242.3k MT. For 11M18, Malaysia’s total exports of palm oil dipped marginally by 0.2% yoy to 15.1m MT.

Inventory Rises as Exports Were Lower Than Production

Given that consumption of palm oil was still below production, inventory continued to build up. Palm oil inventory in November increased for the sixth consecutive month, rising by 10.5% mom to a record high of 3.0m MT.

11M18 CPO ASP at RM2,267/MT (-19.5% yoy)

The average MPOB locally-delivered CPO price in November stood at RM1,830.50/MT, down by 12% mom (Nov17 CPO ASP: RM2,689/MT). For 11M18, the average CPO price was RM2,267/MT vs. RM2,817/MT for 11M17. Prices of vegetable oils, including CPO, have been under pressure with the improvement in global production and the ongoing trade tensions between the US and China. We believe the current CPO price pressure emanates from large palm oil stocks in Malaysia and Indonesia coupled with reserved consumer buying. Nevertheless, the current low CPO price is unlikely to be sustained in 1Q19 when seasonal production declines and world palm oil consumption will likely be in excess of production thereby reducing stocks.

80% Chance of a Weak El Nino

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, it is starting to see some clearer signs of El Nino developing. Forecasters estimate that El Nino conditions will develop in the next few months and that there is around an 80% probability that El Nino will be present through the winter. Currently, it is predicted to be a mild El Nino event.

Maintaining Our NEUTRAL Sector Call and Stock Recommendations

Across our coverage, we have BUY ratings on Ta Ann and WTK; HOLD ratings on FGV, IOI Corp, SD Plantation, Genting Plantations and Jaya Tiasa; and SELL ratings on KL Kepong, IJM Plantations and Hap Seng Plantations (please refer to the peer comparison table on page 1). For plantation-sector exposure, we like Ta Ann as we expect an increase in earnings contribution from both the timber and plantation divisions as production and prices for timber products and palm oil products improve.

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 in the demand and prices of vegetable oils.

Source: Affin Hwang Research - 11 Dec 2018