In our 1Q16 sector outlook we maintain our NEUTRAL call on plantations with an unchanged FY16E CPO price forecast at RM2,400/metric ton (MT). We also revise our Dec-15 stock forecast to 2.86m MT (-2%) from 2.80m MT due to slower-than-expected export recovery. High existing inventory may prevent stock levels from normalising to <2.00m MT until late-1Q16. However, we expect CPO prices to appreciate gradually with trading range of between RM2,000-2,400/MT on supply-driven stock drawdown, high soybean oil (SBO) prices and potentially poor weather. But upside is limited by weak crude oil prices and rising interest rate trends. Gradual CPO price appreciation should support moderate KLPLN appreciation against the KLCI, while 4Q15 earnings will likely to be in line with expectations. Our TOP PICK is TAANN (OP; TP: RM5.70) on undemanding valuations (FY16E PER: 13.3x) and potential timber earnings upside. Other calls and recommendations are maintained, i.e. OUTPERFORM on TAANN (TP: RM5.70), UMCCA (TP: RM7.05), CBIP (TP: RM2.49), MARKET PERFORM on IOICORP (TP: RM4.52), KLK (TP: RM22.80), PPB (TP: RM16.92), and IJMPLNT (TP: RM3.64), UNDERPERFORM on SIME (TP: RM8.00), FGV (TP: RM1.47), GENP (TP: RM9.40), and TSH (TP: RM1.95).

3QCY15 weak as expected. Of the 11 stocks under our coverage, only TAANN came in above consensus, while 5 were within expectations. The remaining 5 which came in below were FGV, GENP, KLK, SIME and TSH. This was slightly weaker than 2Q15 where 2 were above, 4 within, and 5 below. Nearly all planters were affected by the dry weather in Sabah and Kalimantan, resulting in average FFB production increasing only 2% YoY. Average CPO price received fell 10%, resulting in average YoY CNP decline of 27%. FGV was particularly hard hit, falling 178% YoY to core net loss (CNL) of RM193m.

But bright spots remained. Despite the overall weak quarter, we noted that our Top Pick TAANN reported stellar 3Q15 results. Core Net Profit (CNP) at RM125m exceeded both consensus and our forecasts by 9% and 13%, respectively. TAANN also outperformed the KL Plantation Index (KLPLN), appreciating by 39% in 2015 and 34% in 4Q15. In comparison, the KLPLN declined by 2% in 2015, and rose by only 4% in 4Q15. Note that TAANN and UMCCA both recorded strong FFB production growth >10% year-on-year (YoY), thanks to their plantations’ young tree age profile. We are also positive on UMCCA in light of their recent expansion into Indonesia, which should lead to above-average FFB growth in the long-run.

Reassessing Dec-15 stock outlook. We maintain our Dec-15 production decline forecast at -12% to 1.45m MT as we observe that most regions in Malaysia are seeing average-to-below-average rainfall this monsoon season. We think the milder monsoon should improve harvesting productivity, but this is offset by lagged impact from the droughts earlier in the year disrupting yields. Meanwhile, we lower our Dec-15 export growth forecast to -5% (1.42m MT) from -1%, in line with cargo surveyors’ estimated Dec-15 export decline of -5-6%, as export demand picked up slower-than-expected likely owing to ample supply of competing soybean oil in the market. All-in, we expect Dec-15 stock to see a weaker decline of 2% to 2.86m MT (previously 2.80m MT) as total demand (1.60m MT) outweighs total supply (1.55m MT).

Expecting stock drawdown over 1Q16 as demand should pick up in Jan-Feb 2016 over the festival period. Production could also remain soft in early 1Q16, particularly in Sabah, due to the lagged impact of droughts felt in Feb-May 2015 and again in Jul-Sep 2015. However, because of the record high existing stocks (>2.9m MT), we think that stocks are not likely to normalise to <2.0m MT until at least late-1Q16.

2015 CPO price lacklustre as expected. CPO prices in 2015 were weak as expected, averaging RM2,168/MT, or -9% against 2014’s RM2,384/MT. This is only 1% shy of our FY15E estimate of RM2,200/MT. Prices were largely range-bound as expected, between RM2,000-2,400/MT, peaking at RM2,371/MT in Jan-15. Despite dropping to a low of RM1,806/MT in Aug-15 in tandem with crude oil prices, CPO prices rapidly rebounded to trade above RM2,000/MT by mid Sep-15. Nevertheless, 4Q15 prices maintained its range-bound trend as palm oil stocks hit new record highs, thus depressing prices. 

Source: Kenanga Research - 7 Jan 2016