Dec 2016 stocks of 1.67m MT (+0.2% MoM) were higher than consensus (1.61m MT) and our forecast (1.63m MT) on lower-than-expected exports at 1.27m MT compared to consensus (1.32m MT) and our forecast (1.33m MT). Looking ahead, we expect Jan 2017 stocks to drop below 1.50m MT (-11% to 1.49m MT) as production falls 14% to 1.27m MT while exports largely flat (+1% to 1.28m MT). The negative impact from higher-than-expect stocks should be temporary given likely production weakness ahead. We reiterate NEUTRAL with a short-term POSITIVE stance as we increase our 1Q17 CPO trading range to RM2,900- 3,300 while FY17E CPO price is unchanged at RM2,550/MT. Our TOP PICK is TAANN (OP; TP: RM5.00) as a double beneficiary of higher CPO prices and stronger USD/MYR, while we also like laggard pure plays such as IOICORP (OP; TP: RM5.15) and young planters IJMPLNT (OP; TP: RM3.92) and UMCCA (OP; TP: RM7.11). Other calls and TPs are maintained, namely OUTPERFORM on HSPLANT (TP: RM3.00); MARKET PERFORM on SIME (TP: RM8.60), KLK (TP: RM26.00), PPB (TP: RM16.75), FGV (TP: RM1.72), TSH (TP: RM2.12), and CBIP (TP: RM2.10); and UNDERPERFORM on GENP (TP: RM10.90).

Unexpectedly higher stocks. Dec 2016 stocks unexpectedly edged up 0.2% month-onmonth (MoM) to 1.67m MT compared to consensus’ forecast of 1.61m MT (-3% MoM) and our 1.63m MT (-2% MoM). This was largely due to lower-than-expected exports at 1.27m MT (-7% MoM) compared to consensus’ 1.32m MT (-4%) and our 1.33m MT (-5%) estimates – likely due to buyers switching to soybean oil (SBO) on the back of narrowed SBO-CPO premium. Production at 1.47m MT (-6%) was largely in line (consensus and ours: 1.45m MT) for full-year production of 17.32m MT, or -13% YoY, reflecting the mid-2015 lagged drought impact.

Expect customary Jan production drop. Dec 2016 production at 1.47m MT (-6% MoM) was slightly higher than our estimate and consensus’ 1.45m MT expectation but eased off the 5-year production low of 1.13m MT which was an improvement on the last 3 consecutive months of 5-year low monthly production. Still, production weakness was highest in Sabah (-10%), followed by Peninsular Malaysia (-7%) and Sarawak (-2%).

Exports to be largely flat (+1% to 1.28m MT). Dec 2016 exports continued its lacklustre trend at 1.27m MT, below both consensus (1.32m MT) and our (1.33m MT) forecasts. We think the low soybean oil (SBO) to CPO premium contributed to weak demand, especially from China (-27% to 159k MT) though the easing currency shortage in India led to some demand gains (+25% to 165k MT). For the year, however, demand from Malaysia’s top three palm oil buyers dropped (China: -21% to 1.89m MT, India: -23% to 2.83m MT, EU: -15% to 2.06m MT), likely due to the sharp jump in CPO prices and ample soybean supply increasing the attractiveness of other edible oils. Looking ahead, we expect strong demand in the early weeks of Jan 2017, with Intertek noting an 8% MoM increase as of 10 Jan. However, we think selling will slow towards month-end and early Feb 2017 as the Chinese New Year celebrations get underway. Thus, we think Jan 2017 demand will be largely flat, at +1% to 1.28m MT.

Stocks to fall under 1.50m MT (-11% to 1.49m MT). We expect demand at 1.50m MT to lead over supply at 1.33m MT in Jan 2017. On the supply side, production is likely to drop in line with historical trends, by 14% to 1.27m MT. Meanwhile, good early demand is likely to taper off given upcoming festivities and ample soy supplies, for ending exports of +1% to 1.28m MT. Overall, we forecast Jan 2017 stocks to fall below the 1.50m MT mark with an 11% decline to 1.49m MT.

Short-term buying opportunity? While the unexpectedly high Dec 2016 closing stock could cause CPO prices to weaken, we think this will only be temporary as continued production weakness should lead stocks lower in Jan 2017, sustaining prices in Feb 2017. We update our latest 1Q17 CPO price trading range to RM2,900-3,330/MT (from RM2,800-3,200/MT) as we refresh our SBO & gasoil-based CPO price ceiling and floor bands to reflect a SBO-CPO premium of USD80/MT (+1.0SD basis) and gasoil-CPO discount of USD150/MT (average basis). Despite a 46% jump in CPO prices since end-2015, we note that planters’ share prices have only increased by up to 9% over the same period, indicating that the market has yet to price in the sharp CPO price appreciation and resulting 4Q16-1Q17 earnings impact despite already digesting earlier production weakness in 9M16. Thus, in line with our 1Q17 strategy (published 5 Jan 2017), we continue to think that planters are undervalued against the current CPO price environment, which should be sustained at least up to mid-1Q17.

NEUTRAL on Plantations but near-term POSITIVE. We remain positive in the near-term with a 1Q17 CPO trading range of RM2,900-3,330/MT and FY17E CPO average of RM2,550/MT. While the market may temporarily turn negative on a continued increase in monthly stocks, we expect CPO prices to recover on Jan 2017 production weakness. Meanwhile, external factors remain supportive, especially a stronger USD, better crude oil prices and sustained SBO prices in spite of production pickup. However, weak demand from key markets could continue to be a risk going forward, especially considering the narrow SBOCPO price gap. Our TOP PICK is TAANN (OP; TP: RM5.00) as we believe the high CPO price and USD/MYR benefit both its Palm Oil and Timber businesses, while dividend yield at 4.1% is among the highest for the sector. We also like laggard pure plays such as IOICORP (OP; TP: RM5.15), and younger planters IJMPLNT (OP; TP: RM3.92) and UMCCA (OP; TP: RM7.11) for its young area in Kalimantan which appears to be seeing faster production recovery compared to Malaysian areas.

Source: Kenanga Research - 11 Jan 2017