Jan 2017 stocks came in at 1.54m MT (-8% MoM), 3% higher than consensus and our 1.49m MT. Production at 1.28m MT (-13%) was lower than consensus’ 1.33m MT but in line with our forecast (1.27m MT). Meanwhile, exports at 1.28m MT (+1%) disappointed consensus (1.32m MT) but met our expectation. Going forward, we think stocks for Feb 2017 will continue falling, by 8% to 1.42m MT as demand (1.33m MT) outweighs supply (1.21m MT). This is premised on both weaker exports (-12% to 1.13m MT) on unattractive price and supply fundamentals, plus seasonally softer production (-10% to 1.15m MT). Nevertheless, we remain near-term POSITIVE and long-term NEUTRAL on the sector with an updated 1Q17 CPO trading range of RM2,850-3,360/MT and unchanged FY17E CPO price of RM2,550/MT. In view of the likely strong end-Feb results season, we think investors can consider taking profit on planters. Nevertheless, we continue to like our TOP PICK, TAANN (OP; TP: RM5.00) which should also see solid timber earnings on strong USD. 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 SIME (TP: RM9.88), HSPLANT (TP: RM3.00); MARKET PERFORM on, KLK (TP: RM26.00), PPB (TP: RM16.75), GENP (TP: RM12.40), FGV (TP: RM1.72), TSH (TP: RM2.12), and CBIP (TP: RM2.10).

Higher-than-expected Jan 2017 stocks. Jan 2017 stocks closed at 1.54m MT (-8% Month-on-Month (MoM)), or 3% higher than our and consensus 1.49m MT. Production fell 13% to 1.28m MT - in line with our 1.27m MT (-14% MoM) but lower than consensus 1.33m MT (-10% MoM) while exports at 1.28m MT (+1% MoM) was spotted on with our forecast, but disappointed consensus 1.32m MT (+4%). Stocks closed higher than our expectation largely on higher-than-expected imports coupled with weaker-than-expected local consumption, despite the new year festival period.

Production to bottom in Feb 2017 (-10% to 1.15m MT). Jan 2017 production weakened for the 4th month running, with a 13% decline to 1.28m MT. Sabah production saw the most severe MoM decline (-23%) followed by Peninsular Malaysia (-18%) and Sarawak (-6%). Looking ahead, we foresee lower harvesting days and seasonal impact to further weaken production, in line with historical February production patterns. Hence, we think Feb 2017 production will decline 10% to 1.15m MT.

Exports likely to go lower (-12% to 1.13m MT). Exports in Jan 2017 were relatively flat (+1% MoM) as improved China (+5% to 167k MT) and global (+18% to 755k MT) demand offset weaker Pakistan (-50% to 48k MT), EU (-21% to 36k MT) and India (- 15% to 139k MT) demand. Looking ahead, we think tight supplies, high prices and less trading days could continue to dampen demand. Furthermore, compared to soybean oil (SBO), CPO is currently trading at a USD10/MT discount month-to-date (MTD), which is very unattractive against to the 2-year average (USD100/MT). As a result, we expect exports to remain soft in Feb 2017, at -12% to 1.13m MT.

Stocks to continue decline (-8% to 1.42m MT). We estimate demand at 1.33m MT to outweigh supply at 1.21m MT in Feb 2017. Given weak demand fundamentals we think Feb 2017 exports should further weaken 12% to 1.13m MT. Production meanwhile should continue trending with seasonal patterns, for a decline of 10% to 1.15m MT. Nevertheless, after including local demand (206k MT), we expect Feb 2017 stocks to further decline by 8% to 1.42m MT.

Positive near-term view intact. We maintain our long-term NEUTRAL view on Plantations but we are still short-term POSITIVE on the sector, with an updated 1Q17 trading range of RM2,850-3,360/MT (CPO-gasoil premium of USD150/MT or +0.5SD on 3-year average; CPO-SBO discount of USD0/MT or +2.5SD on 3-year average) from RM2,900-3,300/MT. Despite slightly higher-than-expected closing stocks, we think CPO prices will continue to be supported by expectations of lower production in Feb 2017. However, in the mid-term, we believe a CPO price correction is likely in late 1Q-2Q17 as production sees its seasonal uptick, thus maintaining a reasonable discount to SBO. Hence, we think investors can consider taking profit over the likely strong results season in end-Feb. Nevertheless, in view of likely production recovery, we favour planters with above-average growth prospects such as our TOP PICK, TAANN (OP; TP: RM5.00) which should also see improvement in its timber earnings thanks to stronger USD. Other high-growth planters include IJMPLNT (OP; TP: RM3.92) and UMCCA (OP; TP: RM7.11) thanks to their young planted areas in Kalimantan. We also like laggards pure plays such as IOICORP (OP; TP: RM5.15) for its cost efficiency advantage and expected client recovery in 2017 after the resolution of its mid-2016 RSPO suspension.

Source: Kenanga Research - 13 Feb 2017