Malaysia’s Jan-15 palm oil stocks of 1.77m MT came in at both our and market expectations. Production dropped 15% to 1.16m MT while exports declined 22% to 1.18m MT. We think the lower production was due to the extended poor weather compounding the low production season. Weaker exports arising from competitive soybean oil (SBO) prices were partly offset by stronger local demand due to the upcoming festive season. However, we think domestic demand is likely to moderate after the festive season, while exports could see further weakness. We expect Feb-14 inventory to decline further by 7% to 1.65m MT but upside could be limited by the narrowing discount between CPO and SBO prices. Looking ahead, upcoming 4Q14 earnings are likely to see more ‘misses than hits’ due to lower CPO prices and production. Reiterate NEUTRAL on planters with unchanged FY15E CPO price of RM2,200/MT as we expect CPO prices to weaken in 2H15 due to higher production, competitive SBO prices and lower crude oil prices. However, lower inventory expectations should support CPO prices in the near-term, and share prices should remain resilient due to the heavy weighting of planters in the FBMKLCI. Our Top Pick is SIME (OP; TP: RM9.92) on news-flow expectations regarding its auto division IPO. Maintain MARKET PERFORM on KLK (TP: RM21.50), PPB (TP: RM15.26), FGV (TP: RM2.30), IJMP (TP: RM3.30), TSH (TP: RM2.18), TAANN (TP: RM3.70), UMCCA (TP: RM6.68), and CBIP (TP: RM2.05); and maintain UNDERPERFORM on IOICORP (TP: RM4.40) and GENP (TP: RM9.20).
Jan-14 stocks level of 1.77m MT met both our and market expectations. Jan- 14 ending stocks met both our and consensus expectations of 1.77m MT, showing a MoM decline of 12% and falling for the second month in a row. Production dropped 15% to 1.16m MT exceeding our expected 12% decline and is the weakest since Feb-11. However, this was negated by lower exports of 1.18m MT (-22%), below both consensus (1.29m MT; 9% lower) and our estimate (1.34m MT; 12% lower). We think the lower production was because of extended poor weather in both Peninsular Malaysia and East Malaysia, compounding the seasonally weaker January production.
Weaker exports partly offset by stronger local demand. We observe that a sharp drop in exports (-22% to 1.18m MT) was offset by higher domestic demand (+59% to 0.31m MT). As expected, demand from India slowed significantly, falling 58% to 154m MT after buyers stocked up in Dec-14 in anticipation of higher import duties. Overall exports saw a slowdown as well with weaker demand from China, EU, Pakistan and US which led to total exports falling 22% MoM. We think this is due to increased competition from soybean oil (SBO) which is currently seeing declining prices and large export supplies after a bumper harvest. The lower exports were partly offset by a surge in domestic demand which we believe is due to the upcoming Chinese New Year festivities in mid-Feb. However, we think domestic demand is likely to moderate after the festive season, while exports could see further weakness due to competitive SBO prices.
February inventory could further decline 7% to 1.65m MT, however price upside is limited. We expect total demand of 1.33m MT to outpace total supply of 1.22m MT in Feb-15. On the supply side, we assume production to further decline by 3% to 1.13m MT in line with historical patterns seen in February after a sharp (>10%) production decline in January. Demand-wise, we think exports could slip 8% to 1.09m MT due to price competition from SBO as highlighted above. Note that the Jan-15 average CPO and SBO price is USD638/MT (+2.1% MoM) and USD711/MT (+0.6% MoM), for a CPO discount of USD73/MT. However, the February month-to-date (MTD) average CPO and SBO price is approximately USD637/MT (-0.2% MoM) and USD695/MT (-2.2% MoM) respectively, representing a narrowing CPO discount of USD58/MT. In context, the 3-year average CPO discount is USD187/MT while the peak/trough discount level was USD458/MT in Dec-12 and USD33/MT in Mar-14, respectively. Thus, while lower inventories could be supportive to CPO prices in the near-term, we think upside is limited due to the narrowing discount of CPO vs. SBO prices. Hence, we maintain our FY15E CPO price at RM2,200/MT.
Expecting a weaker 4Q14 earnings season. We think that the upcoming 4Q14 earnings is likely to decline YoY and QoQ because we observed that the 4Q14 CPO price of RM2,194/MT is 13% lower YoY than 4Q13’s RM2,511/MT and 1% lower QoQ than 3Q14’s RM2,212/MT. As it is, 4Q14 industry production of 5.01m MT is 9% lower YoY than 4Q13’s 5.50m MT and 10% lower QoQ than 3Q14’s 5.59m MT. In our view, the lower earnings outlook should keep upside limited for planters’ share prices in the short-term. There could be more ‘misses than hits’ this quarter. We think that only the planters with exceptionally high FFB growth (ie. TSH and IJMP) might be able to negate the effect of lower CPO prices with better production growth. Recall in the previous quarter that five of the eleven stocks under our coverage came in below consensus estimates while three came in above expectations (IJMP and TAANN). Meanwhile, three companies (GENP, TSH and CBIP) came in within consensus. Nevertheless, we believe downside is limited as valuations-wise, most planters within our coverage are already trading at or below their 3-year historical mean PER, with the exception of GENP and CBIP which are trading between mean to +1.0SD on historical PER.
Reiterate NEUTRAL, with FY15E CPO outlook maintained at RM2,200/MT. While the Ytd CPO price of RM2,284/MT is higher than our expected RM2,200/MT for FY15, we expect CPO prices to weaken in 2H15 when peak production kicks in, compounded by cheap SBO and the weaker ringgit. However, we maintain our NEUTRAL view on the sector as we think CPO prices should be supported by lower inventory expectations in the near-term. Furthermore, share prices should remain relatively resilient due to the heavy weighting of planters in the FBMKLCI and scarcity of Shariah-compliant stocks, while CPO prices are expected the be largely range-bound this year. Our Top Pick for the sector is SIME (OP; TP: RM9.92) as we take the view that market excitement on its upcoming auto division IPO in late-3Q15 should surpass the corporate earnings impact from potentially weaker plantation earnings.
Source: Kenanga
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