Apr 2016 inventory declined for the fifth month in a row, coming in at 1.80m MT (-5% MoM), below consensus (1.82m MT) and our forecast (1.87m MT). This was due to weaker-than-expected production gain at 1.30m MT (+7%), partly offset by exports decline to 1.17m MT (-13%). Looking ahead, we expect production to continue its seasonal uptrend with a 14% growth to 1.48m MT. Meanwhile, exports should strengthen as well, by 19% to 1.39m MT on pre-festival demand. Overall, stocks level should continue to weaken, by 4% to 1.74m MT as demand outstrips supply growth. We maintain our NEUTRAL call with strengthening demand and weakening ringgit to sustain CPO prices up to a nearterm peak of RM2,800/MT. However, FY16E CPO price is maintained at RM2,400/MT as 2H16 prices should trend downwards on coming US rate hikes and production increase. 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: RM16.60), IJMPLNT (TP: RM3.71), TSH (TP: RM2.38), and TAANN (TP: RM5.88); UNDERPERFORM on SIME (TP: RM7.75), IOICORP (TP: RM4.25), FGV (TP: RM1.21), and GENP (TP: RM11.30).

Apr 2016 stocks came in lower-than-expected at 1.80m MT (-5% MoM), which was 1% below consensus (1.82m MT) and 4% below ours (1.87m MT). This was mainly due to weaker-than-expected production at 1.30m MT (+7% MoM), below consensus (1.33m MT) by 2% and our forecast (1.40m MT) by 7%. That aside, exports were weaker than expected as well, at only 1.17m MT (-13%), below consensus (1.25m MT) by 7% and our forecast (1.27m MT) by 8%, largely due to poor demand from China (- 33% MoM to 95k MT) and India (-45% to 180k MT).

Production to pick up in May (+14% to 1.48m MT). Despite a 7% increase, Apr 2016 production was weaker-than-expected at 1.30m MT. This was only slightly higher than the five-year low April production of 1.27m MT. While production in all three key production regions (Peninsular, Sabah and Sarawak) rose by 4-12% MoM, Sabah and Peninsular Malaysia production declined by 26% YoY which indicate that these regions are still struggling to recover from last year’s droughts. Going forward, we are expecting seasonal production to pick up, with an expectation of 14% increase to 1.48m MT in May 2016, which is still 18% below May 2015 production.

Expect stronger exports (+19% to 1.39m MT). Apr 2016 exports which dropped 13% to 1.17m MT was weaker than expected. Indian exports fell the most, by 45% to 180k MT, followed by China’s 33% decline to 95k MT. We believe the former was due to higher prices and lack of demand catalyst, while the latter was likely due to stronger demand for soy over palm oil. Looking forward, we think exports should pick up on stocking-up activity ahead of the upcoming Ramadan period. Hence, we expect May 2016 exports to rise by 19% to 1.39m MT.

May 2016 stocks to extend decline by 4% to 1.74m MT. While production is likely to increase, stronger exports should see demand at 1.61m MT edging supply at 1.54m MT. On the supply side, we expect 14% higher production to 1.48m MT, slightly above seasonal trend but still below the 5-year average level. On the demand side, exports should improve strongly by 19% to 1.39m MT ahead of the coming festive season. Overall, we expect May 2016 stocks to close at 1.74m MT (-4% MoM), in line with our expectation that stocks level could remain below the 2.00m MT mark up to mid-late 3Q16.

Maintain NEUTRAL. We think the lower stock numbers may have a slight positive impact on CPO prices, although the poor demand and rising production trend could limit further upside. Near-term, with stronger demand and the weakening ringgit, we think CPO prices could remain high for another 1-2 months with a potential peak of RM2,800/MT based on a discount to soybean oil of USD40/MT (about -1.0SD to historical average discount). Longer-term, 2H16 CPO prices are likely to trend downwards as rising production trends and US rate hikes put pressure on commodity prices. We think our Top Pick KLK (MP; TP: RM25.25) should see good upside potential at RM27.48 on higher CPO prices, based on our CPO-derived PER model, 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 less-volatile orderbook-based earnings which could improve as planters tend to commission new mills while CPO prices are high.

Source: Kenanga Research - 11 May 2016