Mar-16 inventory declined for the fourth month in a row, falling 13% to 1.89m MT. This was below consensus (1.95m MT) and our forecast (1.96m MT) as exports picked up 23% ahead of the 5% export duties effective Apr-16. Going forward, we think production will continue improving, by 15% to 1.40m MT, while exports will likely soften 5% to 1.27m MT on weaker Indian demand and belowaverage demand in other key markets. Overall, we think stocks will still decline slightly (-1% to 1.87m MT) as production remains on the weak side despite the start of seasonal pickup. No change to our NEUTRAL long-term outlook on plantations with FY16E CPO price maintained at RM2,400/MT. But for the short-term, we are still positive as 2Q16 CPO prices should remain buoyed by low stocks with a potential peak of RM2,850/MT. Top Pick KLK (MP; TP: RM25.25) should be a near-term beneficiary with expected peak valuation of RM27.48 on higher CPO prices, while downside is limited by its big-cap status. We also like Top Pick CBIP (OP; TP: RM2.49) for its stable orderbook-based earnings which could benefit from rising CPO prices. We also have OUTPERFORM on UMCCA (TP: RM7.42); MARKET PERFORM on PPB (TP: RM16.92), IJMPLNT (TP: RM3.71), TSH (TP: RM2.38), and TAANN (TP: RM5.88); UNDERPERFORM on SIME (TP: RM7.15), IOICORP (TP: RM4.66), FGV (TP: RM1.28), and GENP (TP: RM11.30).

Mar-16 stocks lower-than-expected at 1.89m MT (-13% MoM). Mar-16 stocks declined 13% month-on-month (MoM) to 1.89m MT, below both our forecast (1.96m MT) by 4% and consensus forecast (1.95m MT) by 3%. This was largely due to strongerthan- expected exports at 1.33m MT (+23% MoM), exceeding our expected 1.23m MT and consensus’ 1.22m MT by 9%. The pickup was likely due to stronger selling interest ahead of the 5% CPO export tax to be applied in Apr-16. Meanwhile, production increased 17% MoM to 1.22m MT, also higher than our expected 1.19m MT and consensus’ 1.13m MT by 3% and 8% respectively.

Expect production to strengthen 15% to 1.40m MT. Mar-16 production was strongerthan- expected, rising 17% to 1.22m MT. However, this was only slightly higher than the five-year-low March production of 1.21m MT. Notably, Sabah production remained soft at 315k MT, 22% below its Mar-15 production, which indicates that the region has yet to recover from last year’s droughts. Looking ahead, we expect to see continued seasonal production pickup at +15% to 1.40m MT, which would still remain below the five-year-average April production at 1.48m MT.

Exports likely softer (-5% to 1.27m MT). With the reinstatement of CPO export duties effective Apr-16, Mar-16 exports rose higher than expected, by 23% to 1.33m MT. The strongest volume pickup was seen in India (+150k MT or +85% to 328k MT) followed by China (+89k MT or +167% to 142k MT). Despite higher Chinese demand, Mar-16 export volume was only slightly higher than the 8-year low of 133k MT. For Apr-16, we expect to see below-average demand in China, EU, Pakistan and USA, while Indian demand should remain above-average, yet lower MoM as buyers are likely well-supplied after the high volume seen in Mar-16. As a result, we believe Apr-16 total exports will trend lower (-5%) to 1.27m MT.

Apr-16 stocks should decline marginally (-1% to 1.87m MT). Despite higher production and lower export, we still expect demand at 1.48m MT to slightly edge supply of 1.46m MT in Apr-16. On the supply side, production should continue to improve 15% to 1.40m MT on seasonal pickup. Demand-side should soften 5% to 1.27m MT on weaker demand from India and belowaverage demand in other key regions. However, Apr-16 stocks should still decline slightly to 1.87m MT and we maintain our expectation that stocks could remain below the 2.00m MT mark up to mid-late 3Q16.

Maintain NEUTRAL view, short-term outlook remains positive. We reiterate our NEUTRAL outlook on plantations although short-term prospect remains positive as we expect low stocks to sustain prices over the next 2-3 months with a projected peak of RM2,850/MT. Longer-term, 2H16 CPO prices are likely to trend downwards on rising production trends and US rate hikes putting pressure on commodity prices. In the near term, we think our Top Pick KLK (MP; TP: RM25.25) has good upside potential, with our CPO-derived PER model indicating prices could hit RM27.48 with CPO prices at RM2,850/MT, while downside is limited due to its big-cap status. We also like our Top Pick CBIP (OP; TP: RM2.49) in the mid-term due to its lessvolatile orderbook-based earnings which could improve as planters tend to commission new mills while CPO prices are high.

Source: Kenanga Research - 12 Apr 2016