Jul-15 palm oil stocks reached an 8-month high at 2.27m metric tons (MT), above both consensus (2.19m MT) and our forecast (2.14m MT). Production rose (+3% to 1.82m MT) to another monthly high, while exports weakened (-6% to 1.60m MT) due to the weak post-festive demand in early July. Going forward we expect production to continue rising 12% to 2.03m MT, matching last year’s record, while exports should strengthen 3% to 1.65m MT as export patterns stabilize. Overall we expect Aug-15 inventory to close 10% higher to 2.49m MT on robust production outweighing decent demand. The upcoming reporting season should see improvement QoQ on production growth, but mixed YoY financial results due to lower CPO prices. We reiterate our NEUTRAL call with unchanged FY15-16E CPO forecasts of RM2,200- RM2,400/MT with prices unlikely to linger below RM2,000/MT unless crude oil prices plunge further. We expect biodiesel and dry weather to support short-to-mid-term prices. Maintain OUTPERFORM on IOICORP (TP: RM4.50), TAANN (TP: RM4.80) and CBIP (TP: RM2.49); MARKET PERFORM on SIME (TP: RM9.04), KLK (TP: RM21.80), PPB (TP: RM16.95), FGV (TP: RM1.75), GENP (TP: RM10.42), IJMPLNT (TP: RM3.73), TSH (TP: RM2.45), and UMCCA (TP: RM6.70).

Jul-15 ending stock higher-than-expected at 2.27m MT. Jul-15 month-end inventory rose to an 8-month high of 2.27m MT (+5%), exceeding both consensus (2.19m MT) and our forecast (2.14m MT) by 4% and 6%, respectively. As expected, production rose to 1.82m MT (+3%), more than consensus’ expectation (1.78m MT) by 2% but short of our forecast (1.87m MT) by 3%. Exports declined to 1.60m MT (- 6%) which was within consensus forecast (1.58m MT) by 1% but below our expectation (1.71m) by 6%. Cargo surveyor data indicates that although local exports in 15-31st Jul-15 indeed rallied 31% over 1-15th Jul-15 after the Indonesian levy began collection, this failed to offset the weak post-festive demand.

Production to hit a new high. Jul-15 production at 1.81m MT continued to exceed the previous monthly record, for the fourth month running. Looking ahead, we think the trend of high production, close to or exceeding historical monthly records could persist up to 4Q15. In line with our expectation of an early peak in Aug/Sep, we project Aug-15 production to continue rising by another 12% to hit 2.03m MT, matching last year’s all-time production record in Aug-15.

Export demand to lag production growth. Monthly exports were softer at 1.60m MT as India and Pakistan’s demand fell 19% to 0.35m MT and 44% to 0.04m MT, respectively post-Ramadan; although demand in China (+15% to 0.28m MT) and US (+66% to 0.07m MT) saw some pick-up. We think after the implementation of the Indonesian levy, export patterns will likely stabilise with Malaysia taking between 45-55% of combined Malaysia-Indonesia monthly palm exports, which averaged 3.1m MT in the last 3 years. Despite a better export outlook, we think export growth will likely trail production growth in Aug-15 at +3% to 1.65m MT.

Aug-15 inventory to rise 10% to 2.49m MT. We forecast Aug-15 supply at 2.12m MT to exceed demand at 1.90m MT, resulting in higher closing inventory at 2.49m MT (+10% MoM). Supply-wise, production should continue rising another 12% to 2.03m MT in line with pre-peak trends. Demand should increase as well by 3% to 1.65m MT as Malaysian export recovers its market share. Allin, we expect higher closing inventory at 2.49m MT (+10% MoM) as demand is unlikely to keep pace with production growth for now.

Expect strong 2Q15 results QoQ, but YoY likely mixed. We observe that QoQ CPO growth for Malaysia at 39% far exceeded the CPO price decline of 3% to RM2,194/MT, indicating that planters should report better upstream performance against the historically weak 1Q. However, YoY FFB growth averaged 10%, which was below the CPO price decline of 15%. Thus, we expect most planters to report softer earnings and margins YoY in the coming results season. Among our core coverage, we expect TAANN (OP; TP: RM4.80) to report solid earnings YoY as lower CPO prices are offset by its strong 2Q15 YoY FFB growth at 28%.\

Source: Kenanga Research - 11 Aug 2015

Maintain NEUTRAL, expect lacklustre short-term CPO prices. We reiterate our NEUTRAL call on Plantations as we expect ample short-term production to weigh on CPO prices despite the decent demand outlook. However, we think that CPO prices are unlikely to dip below RM2,000/MT for long, unless crude oil prices see a bigger downturn. Otherwise, supportive mid-term price factors include higher Indonesian biodiesel subsidies and the threat of tree stress in certain regions currently experiencing dry weather. Despite weak CPO prices currently, we reiterate our FY15-16E forecasts at RM2,200-2,400/MT as the YTD average of RM2,214/MT remains close to our FY15E forecast. We would only consider downgrading our CPO price forecast if Aug-Dec prices deteriorate below RM1,850/MT for an extended period, though we think this is unlikely due to reasons mentioned above. With mixed results likely in the upcoming reporting season, we advise investors to be selective and lean towards pure planters with younger average tree age and stronger FFB growth to offset lower CPO prices. Planters under our coverage with above average FFB growth include TAANN (OP; TP: RM4.80), IJMPLNT (MP, TP: RM3.73) and GENP (MP; TP: RM10.42).