Slightly lower than expected stocks. Nov-16 stocks increased 5% to 1.66m MT, slightly below consensus and our 1.69m MT estimate by 2%. Production was weaker-thanexpected at 1.58m MT (-6% MoM), 3% under consensus’ 1.63m MT and 7% under our 1.69m forecast, confirming that the production peak had passed earlier than expected in Sep 2016. Exports weakened by 4% to 1.37m MT, close to our expected 1.39m MT and better than consensus’ expected 1.29m MT. This came despite a drop in Indian demand (- 36%) due to post-festival softness and currency reform as China (+16%) and other countries (+5%) stepped up purchases, likely in view of depleted local stocks.

Production downtrend to continue. Production in Nov 2016 continued to weaken, with a monthly decline of 6% to 1.57m MT. This was slightly below the 5-year November production low of 1.63m MT. Production weakened in all three areas, with the largest decline seen in Sabah (-10%) followed by Sarawak (-8%) then Peninsular Malaysia (-3%). This could partly be due to the lagged effect of drier weather in 1Q16 that hit Sabah harder than other states, in addition to the production down season from Sep-Feb months annually. We expect the production downtrend to continue in Dec 2016 with an 8% decline to 1.45m MT. This implies a full-year production of 17.3m MT, about 1% below our previous expected 17.5m MT and 13% lower against 2015.

Exports still soft. Nov 2016 exports weakened by 4% to 1.37m MT, only 1% below our 1.39m MT forecast but 6% above consensus’ 1.29m MT. Indian exports slumped 36% to 131k MT on currency reforms while EU demand weakened 28%, possibly due to a brief drop in soybean oil (SBO) prices (-6% to USD743/MT from 24-Oct to 17-Nov) which narrowed the SBOCPO spread by 37% to USD79/MT, thereby improving SBO attractiveness. However, the decline was partly offset by improved demand from China (+16% to 218k MT) and other countries (+5% to 727k MT), which we believe is due to normalising demand after depletion of high stock levels from earlier in the year. Looking ahead, we expect exports to stay soft in Dec 2016 at -3% to 1.33m MT as major buyer India continues to see cash shortage, while higher CPO prices could deter price-sensitive buyers.

Expect stocks to slip 2% to 1.62m MT in Dec 2016. We expect demand at 1.53m MT to lead supply of 1.50m MT in Dec 2016. Supply-wise, Dec 2016 production should continue declining 8% to 1.45m MT in line with seasonal downtrends. Meanwhile, demand should also weaken with exports -3% to 1.33m MT as high CPO prices deter buyers. Overall, we forecast Dec 2016 stocks to soften slightly by 2% to 1.62m MT.

CPO price forecast to be upgraded with USD and crude oil appreciation. Recent events have led to a sharp appreciation of the USD/MYR which rose 7% to 4.47 in Nov 2016. Over the same period, Brent crude oil prices rose 4% to USD50.5/barrel and a further 9% to USD55.2/barrel month-to-date (MTD) Dec-16. We believe the rapid moves in these CPO pricing elements warrants a review of our model assumptions. While we are in the midst of this review, we tentatively expect to upgrade CY16- 17E CPO prices to RM2,600-2,550/MT from RM2,500-2,400/MT currently. Our updated forecast is largely premised on higher USD/MYR, better crude oil prices, stronger SBO price outlook, and slightly higher year-end stock levels. We intend to elaborate on our rationale once our review is completed in our upcoming 1Q17 sector outlook.

Still NEUTRAL, but near-term POSITIVE as we introduce our 1Q17 trading range of RM2,800-3,200/MT, up from our 4Q16 trading range of RM2,400-2,900/MT based on a peak of USD80/MT SBO-CPO premium (+1.0SD basis) and bottom of USD150/MT CPO-gasoil premium (average basis). We think the lower-than-expected stock levels are supportive, but near-term bullish factors may be limited on soft demand, and a “weak” La Nina. However, downside is limited on a weak ringgit, stronger crude oil prices and decent SBO outlook. With our provisional CPO forecast upgrade, we expect earnings upside across the board. However, we will likely maintain our valuation basis as previous studies suggest that sector re-rating occurs when fullyear average CPO prices are sustained above RM2,500/MT. This may not be the case – while current high prices are positive to planters share price, we expect share price reversion on lower CPO prices as production kicks in from 2H17. While all planters should see CPO price-driven upside, we continue to prefer pure play plantation companies with young average age, including TAANN, UMCCA and IJMPLANT which should see better upside due to their above-average FFB growth prospect.

Source: Kenanga Research - 15 Dec 2016