May-15 palm oil stocks at 2.24m metric tons (MT) were higher than consensus (2.14m MT) by 5% but lower than our forecast (2.32m MT) by 3%. Export volumes were higher (+37% to 1.61m MT) as expected, but import volume unexpectedly rose as well (+56% to 1.01m MT), likely due to higher trading activity. Going forward, we expect a recurrence of production patterns similar to 2005/2014 where annual production peaked early in Aug/Sep. Hence, we expect Jun-15 production to ease down by 5% to 1.72m MT. Meanwhile, export momentum is unlikely to carry forward into Jun-15 as we think pre-Ramadan stocking up is mostly over. Thus we forecast flattish exports at +2% to 1.65m MT. All-in, we expect Jun-15 closing stocks to decline 5% to 2.14m MT. We reiterate our FY15E CPO price at RM2,200/MT as we expect the recent rally to lose steam due to slower export growth and ample global vegetable oil supplies. Likewise, we maintain our NEUTRAL call on the Plantation sector, although we note that the soft ringgit could lead to financial risk on companies with high USD debt exposure, including IOICORP (MP; TP: RM4.40), GENP (UP; TP: RM9.89) and IJMPLNT (MP, TP: RM3.65). Maintain OUTPERFORM on TAANN (TP: RM4.48) and CBIP (TP: RM2.46), MARKET PERFORM on SIME (TP: RM8.71), IOICORP (TP: RM4.40), PPB (TP: RM16.43), IJMPLNT (TP: RM3.65), TSH (TP: RM2.30), and UMCCA (TP: RM6.61). Maintain UNDERPERFORM on KLK (TP: RM21.66), FGV (TP: RM1.92) and GENP (TP: RM9.89).

May-15 stocks of 2.24m MT higher than expected. Month-end inventory in May- 15 rose 3% to 2.24m metric tonnes (MT). This was higher than consensus expectations (2.14m MT) by 5% but lower than our forecast (2.32m MT) by -3%. Import volume rose sharply (+56% to 1.01m MT), exceeding both consensus and our forecast by 76% and 83% respectively. We think this could be due to a combination of stronger demand for Malaysian palm oil and lower Indonesian CPO prices (in anticipation of the USD50/MT export levy) resulting in more trading opportunities on the Malaysian side. Meanwhile, export volume jumped 37% to 1.61m MT, within consensus expectations (1.61m MT) and above our forecast (1.48m MT). However, local usage weakened (-6.3% to 0.24m MT), below both consensus (0.29m MT) and our forecast (0.25m MT) by 16% and 3% respectively.

Production pattern seeing a repeat? May-15 production rose 7% to 1.81m MT as expected, marking the third straight month of rising production. We observe that the year-to-date (YTD) production pattern matches the trends last seen in 2014 and 2005, which strongly suggests that Jun-15 production could ease before rallying to an early full-year peak in Aug-15 or Sep-15 (instead of Sep-Nov historically). Hence we expect Jun-15 production to decline 5%, in line with last year’s trend, to 1.72m MT.

Expecting flattish exports in Jun-15. May-15 exports rallied as expected, rising 37% to 1.61m MT, even higher than our anticipated +26% due to substantial restocking activity in India (+292% to 0.26m MT), the EU (+105% to 0.27m MT) and China (+37% to 0.36m MT). However, we expect the growth momentum to moderate this month as the bulk of stocking up activity ahead of the Ramadan celebrations is likely to be completed. Furthermore, the higher soybean oil (SBO) to CPO premium (currently at USD140-150/MT against May-15 average of USD117/MT) could serve as a demand catalyst, but we expect this to be temporary due to the ample supply of soybeans in the market. Therefore, we believe Jun-15 exports will edge up only 2% to 1.65m MT, based on the historical average of export growth in the first month of Ramadan.

Jun-15 inventory to decline 5% to 2.14m MT. We expect Jun-15 demand at 1.89m MT to exceed supply of 1.79m MT. On the supply side, we believe production should decline 5%, matching last year’s production pattern. For demand, we think exports will be flattish at +2% in line with historical trends during the Ramadan period. Overall, we forecast Jun-15 inventory to decline 5% to 2.14m MT, snapping a 4-month rising streak.

Maintain NEUTRAL - recent CPO price rally may not be sustainable. Month-to-date (MTD), CPO prices rose 5.5% to RM2,279/MT from May-15’s RM2,161/MT which we think is due to (i) higher palm oil exports in May, (ii) optimism on El Nino and (iii) USD strengthening 3% against the ringgit to USDMYR3.72. However, we view that the rally may be short-lived because we expect exports growth to slow in Jun-15, while global edible oil supply is expected to remain plentiful for the foreseeable future. Furthermore, we view that the El Nino effect on production is only likely to be felt late-2015 to early- 2016. Hence near-term CPO prices are likely to weaken as we head into the peak production season in 3Q15, but long-term prices will be supported by expectations of depressed production in 2016. Thus we maintain our FY15E CPO forecast at RM2,200/MT and reiterate our NEUTRAL call on the Plantation sector. Note that in the current weak ringgit environment, we think companies with high USD debt exposure such as IOICORP (MP; TP: RM4.40), GENP (UP; TP: RM9.89) and IJMPLNT (MP, TP: RM3.65) could see continued earnings risk at the PBT level in 2Q15.

Source: Kenanga Research - 11 Jun 2015