We attended a Bursa Marketplace talk with Mr Dorab Mistry (Director, Godrej International Ltd.). Highlights from the talk included his view that Malaysia may maintain zero export duties in Apr-16 to maintain competitiveness with Indonesia. Mr Mistry also expects soft production with declining stocks heading into 3Q16. We think this is possible as Feb-16 stocks continued to decline 6% to 2.17m metric tons (MT). While this is higher than consensus (2.11m MT) and our forecast (2.07m MT), production at 1.04m MT hit a nine-year low for February. We expect Mar-16 production to pick up (+14% to 1.19m MT), but note that this figure is also a historical low for March. Exports remained weak (-15% to 1.09m MT) on weak India, China and Pakistan demand. Looking ahead, exports should pick up 13% to 1.23m MT, but remain below-average in China, Pakistan and the US. All-in, we expect Mar- 16 closing stock to decline 9% to 1.96m MT, and may not exceed the psychological 2.00m MT level until mid-late 3Q16. Hence, we maintain our short-term positive view on the sector, with unchanged potential peak CPO price of RM2,650/MT (USD45/MT discount to soybean oil price). However, for the long-term, we are NEUTRAL on the sector as production pick-up in 2H16 and ample soybean oil supplies may limit long-term upside. Maintain call and TP on UMCCA (OP; TP: RM7.50), CBIP (OP; TP: RM2.49), IOICORP (MP; TP: RM4.52), KLK (MP; TP: RM25.25), PPB (MP; TP: RM16.92), IJMPLNT (MP; TP: RM3.76), TSH (MP; TP: RM2.38), TAANN (MP; TP: RM5.88), SIME (UP; TP: RM7.15), FGV (UP; TP: RM1.32) and GENP (UP; TP: RM11.30).

In Conversation with Mr Dorab Mistry. Yesterday, we attended a talk organized by Bursa Marketplace and came away with our bullish short-term outlook on the plantation sector intact. While most of Mr Mistry’s discussion centered on topics brought up at his POC2016 talk on 9-Mar- 16, the following points are interesting new remarks that were mentioned: Mr Mistry expects Malaysia to again impose zero export duties for Apr-16 to maintain price competitiveness against Indonesia. However, we note that CPO prices in the last 30 days have traded between RM2,260- RM2,470/MT, which suggests export duties of 4.5-5.0%. Notably, Mr Mistry believes that the production decline since Oct-15 was not only due to seasonal downtrends, but also due to the dryness impact from droughts seen in East Malaysia in Feb-15. Hence, given the extended droughts in the region, he believes soft production could continue towards 2H16, resulting in stock drawdown until 3Q16. We agree that stocks should generally trend downwards towards 3Q16, as we explain in our MPOB inventory review below.

MPOB Feb-16 stocks released – higher-than-expected at 2.17m MT (-6% MoM). Feb-16 stocks at 2.17m MT (-6% MoM) was higher than consensus (2.11m MT) and our forecast (2.07m MT) by 3% and 5%, respectively. Production (1.04m MT) was softer than expected with consensus at 1.09m MT while our forecast was 1.11m MT due to lagged drought impact. However, demand was weak on soft exports (1.09m MT, vs consensus: 1.10m MT; our forecast: 1.18m MT) combined with weak local demand (165k MT, vs consensus: 239k MT; our forecast: 230k MT).

Production to pick up 14% to 1.19m MT. Feb-16 production extended its decline by 8% to 1.04m MT, the lowest February production in nine years. We observe that Feb-16 production has fallen by 54% since the previous peak in Aug-16, compared with the last 10-year historical peak/trough drop between 26-45%. This signals that the previous months’ drought has indeed impacted production negatively, with softer-than-average production likely to persist into mid-year. Nevertheless, based on historical trends, we believe that production should have bottomed out in Feb-16. We expect Mar-16 production to pick up by 14% (8-year average) to 1.19m MT, which would mark another nine-year low.

Expect stronger exports (+13% to 1.23m MT). Feb-16 exports fell 15% to 1.09m MT on weak demand from India (-33% to 178k MT), China (-49% to 53k MT) and Pakistan (-67% to 21k MT). China demand was especially weak with the lowest monthly exports in the last eight years, which we believe is partly due to stronger Chinese buying of soybeans. Going forward, we think overall demand should pick up in line with seasonal trends, although exports will likely remain below-average in China, Pakistan and the US. We estimate Mar-16 demand to improve 13% to 1.23m MT based on aggregate demand trends in major export markets.

Mar-16 closing stock to decline below 2.0m MT (-9% to 1.96m MT). We expect demand at 1.45m MT to outweigh supply of 1.24m MT in Mar-16. On the supply side, production will likely improve 14% to 1.19m MT, although this remains at a nine-year low due to delayed drought impact. On the demand side, exports should pick up 13% to 1.23m MT, which is still below the 8-year March average of 1.30m MT. Overall, we forecast Mar-16 stock to end at 1.96m MT, below the psychological 2.00m MT mark which signifies normalised stock levels. Based on historical production and export trends, we think that stocks may remain below the 2.00m MT mark up to mid-late 3Q16, which should sustain investor interest in the sector at least in 1H16.

Reiterate NEUTRAL on plantations, short-term POSITIVE. We maintain our NEUTRAL long-term outlook, but we are short-term positive on the sector as declining stocks and soft production could drive CPO prices closer to soybean oil (SBO) prices. As a result, we believe CPO prices could peak in the next three months at RM2,650/MT, which represents a USD45/MT discount to current SBO prices. Mid-term outlook is neutral, however, as CPO prices will likely trend down once production picks up in 2H16, while ample soybean oil supplies could limit long-term upside. In this space, we like UMCCA (OP; TP: RM7.50) on its solid long-term FFB growth prospects after its maiden expansion into Indonesia; as well as CBIP (OP; TP: RM2.49) for its stable orderbook-driven earnings. 

Source: Kenanga Research - 11 Mar 2016