Aug-15 palm oil inventory rose 10% to 2.49m MT, a 9-month high, though this is within our forecast and 3% below consensus’ (2.58m MT). Production hit an all-time high at +13% to 2.05m MT, while exports were flat at 1.61m MT. Imports were lower-than-expected, likely because of increased stocking-up in Jul-15 prior to the new Indonesian levy. Going forward, we expect production to peak in Sep-15 at +2% to 2.09m MT but to decline from Oct-15 onwards due to dry weather impact. We think exports will improve 4% to 1.67m MT in line with historical trends. Note also that CPO prices are attractive against closest competitor soybean oil (SBO) with c.USD150/MT discount currently. Nevertheless, we expect Sep-15 inventory to rise 8% to 2.70m MT, a new high, as record supply edges out demand growth. No change to our NEUTRAL call with FY15-16E CPO prices maintained at RM2,200-RM2,400/MT. Short-term CPO prices are expected to remain range-bound between RM2,000-RM2,200/MT, with downside limited by gasoil price levels, but upside limited by SBO prices. Maintain OUTPERFORM on TAANN (TP: RM4.80) and CBIP (TP: RM2.13); MARKET PERFORM on SIME (TP: RM8.30), IOICORP (TP: RM4.36), KLK (TP: RM21.80), PPB (TP: RM16.92), FGV (TP: RM1.30), GENP (TP: RM9.50), IJMPLNT (TP: RM3.50), TSH (TP: RM1.95), and UMCCA (TP: RM6.70).

Aug-15 ending stock at 2.49m MT within expectations. As expected, Aug-15 ending inventory closed 10% at 2.49m MT, meeting our forecast but below consensus’ by 3%. Taking a closer look, month-on-month (MoM) production surged 13% to an all-time high at 2.05m MT, which was 2% below consensus forecast of 2.09m MT but 1% above our expectation of 2.03m MT. Meanwhile, exports were flat at 1.61m MT, close to consensus (1.60m MT) but 3% below our forecast (1.65m MT). Note that Aug-15 imports at 66k MT was well below consensus (85k MT) and our (90k MT) forecast, likely due to excess imports in Jul-15 (143k MT) prior to the implementation of the Indonesian palm oil levy.

Production to peak at 2.09m MT. Aug-15 production hit an all-time high at 2.05m MT, as expected. This marks the fifth straight month of record monthly production. We expect the trend to continue into September but reverse from October onwards as the impact of dry weather is felt in certain regions. Hence, we expect FY15 production to peak in Sep-15 at 2.09MT (+2% MoM), representing a new all-time production record.

Exports to pick up 4% to 1.67m MT. Monthly exports were flat at 1.61m MT as lower demand from China and India (-33% to 195k MT, and -25% to 264k MT, respectively) was partly offset by stronger demand from Pakistan (+153% to 62k MT) and Europe (+20% to 255k MT). Looking ahead, we expect overall palm oil demand to improve, given the attractive CPO to soybean oil (SBO) discount close to USD150/MT and the recent CPO decline to below RM2,000/MT vs. 1H15 this year of RM2,228/MT. Thus, we expect Sep-15 exports to improve 4% to 1.67m MT, which is in line with the 10-year average export growth trend.

Sep-15 inventory to hit a new high. We expect Sep-15 inventory to close at 2.70m MT as supply at 2.16m MT exceeds demand at 1.95m MT. As outlined in previous updates, we expect production to peak in Sep-15, increasing 2% to 2.09m MT. Demand-wise, exports should improve 4% to 1.67m MT, in line with historical trends. Consequently, Sep-15 ending inventory should increase 8% to 2.70m MT, representing a new all-time high (previously 2.63m MT in Dec-12).

CPO prices to remain range-bound. CPO futures is traded above RM2,100/MT on potentially supportive policies from both Malaysian and Indonesian authorities such as replanting programs, price stabilisation, and biodiesel initiatives. Note also that despite crude oil prices picking up 16% (from USD43/bbl to USD50/bbl) in the last three weeks, CPO prices have only strengthened 4% in the same period. Taking into consideration these factors, we feel that short-term CPO prices are likely to recover to above RM2,000/MT, which is also close to current gasoil prices. However, we do not expect short-term CPO prices to exceed RM2,200/MT, as this level implies a USD70/MT discount to SBO prices (the year-to-date monthly low).

Maintain NEUTRAL on plantations as we expect short-term CPO prices trade range-bound between RM2,000-2,200/MT. Sector outlook is mixed, with positive catalysts such as supportive government policies and dryer-than-average weather being offset by negatives, including expected all-time high inventories and persistently weak crude oil prices. With low and volatile CPO prices currently, we think short-to-mid-term investors should consider counters with non-plantation exposures, including TAANN (OP; TP: RM4.80) for its timber ops, CBIP (OP; TP: RM2.13) due to its orderbook-based revenues, and PPB (MP; RM16.92) on its consumer exposure.

Source: Kenanga Research - 11 Sep 2015