Oct-16 stocks at 1.57m MT (+2% MoM) were 6% below consensus’s 1.67m MT but in line with our 1.59m MT forecast by 1%. Production unexpectedly softened 2% to 1.68m MT while exports were above expectations, despite coming in flat at -1% to 1.43m MT. Looking ahead, we expect supply improvement at 1.71m MT to exceed slightly weaker demand at 1.59m MT. Production should be flat (+1% to 1.69m MT) on stabilizing weather outlook, while demand should soften 3% to 1.69m MT on lower post-festival demand. Stronger local demand (+34% to 246k MT) should normalize postremoval of cooking oil subsidies. Overall, we expect Nov 2016 stocks to close higher at +7% to 1.69m MT. Prices should remain volatile between RM2,400-2,900/MT on mixed catalysts. We continued to be NEUTRAL on the sector with unchanged FY16-17E CPO prices of RM2,500- 2,400/MT and prefer younger planters TAANN (OP; TP: RM3.94) and UMCCA (OP; TP: RM6.50) on above-average FFB growth prospects. We maintain our remaining calls: MARKET PERFORM on SIME (TP: RM7.90), IOICORP (TP: RM4.60), KLK (TP: RM25.00), FGV (TP: RM2.65), IJMPLNT (TP: RM3.60), TSH (TP: RM1.95) and CBIP (TP: RM2.15); and UNDERPERFORM on PPB (TP: RM15.00) and GENP (TP: RM9.80)

Lower-than-expected stock increase. Oct 2016 stocks were slightly higher (+2% to 1.57m MT), which was lower than consensus’ 1.67m mT (+8% MoM), but roughly in line with our 1.59m MT (+3%) forecast. However, this was largely driven by an unexpected production decline of 2% to 1.68m MT, compared to consensus’ 1.73m MT (+1%) and our 1.89m MT (+10%) estimate. Exports were slightly lower at 1.43m MT (-1%), which was better than consensus’ 1.37m MT (-6%) but well below our 1.65m MT (+14%) expectation. This was largely due to weaker Indian exports (-22% to 204k MT) with weaker post-festival buying, though EU demand partly offset the decline with a 31% increase to 226k MT.

Expect flat production in Nov-16 (+1% to 1.69m MT). The Oct 2016 production decline (-2%) was in line with the consensus forecast of -3% but well below our expected +10%, which was premised on the 5-year historical low figure. Production declined across all three major regions - Peninsular Malaysia (-2%), Sarawak (-4%) and Sabah (-1%). Possible explanations include continued drought impact and seasonal production decline, compounded by increased rainfall, which disrupts fruit collection. Looking ahead, we think that with the low chance of year-end La Nina, production should remain relatively stable with a seasonal December decline less severe than last year's drop of 19%. In Nov 2016, we expect flattish production (+1%) to 1.69m MT, while Dec 2016 production should come in at c.1.53m MT (-9%), which is in line with the 5-year historical average. This would bring full-year production to 1.75m MT, or -12% against 2015.

Nov-16 demand likely weaker (-3% to 1.39m MT). Oct 2016 exports decline of -1% was stronger than consensus' expectation of -6% but fell short of our +14% forecast as festival buying appeared to have been filled the previous month. Looking ahead, we expect slight demand recovery in China for restocking purposes, but flat-to-lower demand in other countries, in line with previous buying patterns. As a result, we expect demand to remain soft at -3% to 1.39m MT in Nov 2016.

Stronger disappearance likely a one-off. Oct 2016 disappearance jumped 34% to 246k MT, which was in line with consensus’ 246k MT estimate, and 8% higher than our 198k MT forecast. This was largely due to stocking-up activity as the removal of cooking oil subsidies was announced on 20th Oct. We expect local demand for cooking oil to be somewhat subdued in the shortterm as end-users stock up, but total palm oil disappearance should normalize if B10 biodiesel implementation begins as scheduled in Dec 2016. Hence, we expect Nov 2016 domestic disappearances at 207k MT, close to the 3-month average.

Closing stocks to increase 7% to 1.69m MT. We expect supply at 1.71m MT to exceed demand at 1.59m MT for higher closing stocks of 1.69m MT (+7%). Production should increase marginally at +1% to 1.69m MT on stabilising weather outlook, while demand is likely to stay soft at -3% to 1.39m MT on lower post-festival demand. Meanwhile, domestic disappearance should normalize as buyers digest the impact of cooking oil subsidy removals.

Maintain NEUTRAL on Plantations with unchanged 4Q16 price trading range of RM2,400-2,900/MT. We think the unexpectedly low stock levels, supportive prices, and recent increased market uncertainty should temporarily whet investors’ appetite for safer plantation plays. Other catalysts include weaker-than-expected year-end production and a possible La Nina, though the probability has declined sharply from mid-2016. Risks include stronger-than-expect US soybean production causing headwinds for soybean oil prices, and potential US rate hike in the coming months which tends to weaken commodity prices. No change to our FY16-17E CPO price forecast of RM2,500-2,400/MT. We continue to prefer TAANN (OP; TP: RM3.94) and UMCCA (OP; TP: RM6.50) as their younger average tree age should yield above-average FFB production in the near-mid-term.

Source: Kenanga Research - 11 Nov 2016