We attended the Bursa Malaysia Palm & Lauric Oils Price Outlook Conference & Exhibition, where experts estimated a 2017 CPO price of RM2,670/metric ton (MT), or 5% above our expected RM2,550/MT. Price forecasts ranged between RM2,200-3,200/MT, in line with expected range for 2016. Common bullish themes include slow stock replenishment, narrower crude oil premiums and positive global biodiesel policies. Weather risk was cited as a potential price catalyst. Meanwhile, bearish factors include stronger 2H17 production, weak soy price outlook and potential US protectionism. We maintain our NEUTRAL call with a lower short-term CPO trading range of RM2,700-2,970/MT (from RM2,850-3,360/MT) due to lower CPO-gasoil premium and higher CPOsoybean oil discount. We maintain our FY17E average of RM2,550/MT. No change to our calls, with OUTPERFORM on IOICORP (TP: RM5.15), IJMPLNT (TP: RM3.92), HSPLANT (TP: RM3.00) and UMCCA (TP: RM7.11); and MARKET PERFORM on SIME (TP: RM9.60), KLK (TP: RM26.00), PPB (TP: RM17.60), GENP (TP: RM12.40), FGV (TP: RM1.85), TSH (TP: RM2.00), TAANN (TP: RM4.10) and CBIP (TP: RM2.10).

Bursa Malaysia POC2017. We attended the annual Bursa Malaysia Palm & Lauric Oils Price Outlook Conference & Exhibition, held at Shangri-La Hotel in Kuala Lumpur over the last two days. POC2017 is one of the major palm oil industry events and was well attended by c.1,650 participants from the global oils and fats industry.

Forecasters expecting c.RM2,670/MT in 2017. Price forecasters projected a similarly broad range as 2016, with a CPO price low of RM2,200/metric ton (MT) and high of RM3,100/MT. This is in line with the range of RM2,200-3,200/MT in 2016, although this year’s justification for low prices (production recovery vs. 2016’s crude oil oversupply) and high prices (bullish biodiesel policies & weather risk vs. 2016’s weaker production due to drought) were different. A common theme supporting CPO prices was tight supplies and positive global biodiesel policies, while forecasters agreed that the production recovery expected in 2H17 would place downward pressure on prices. Several forecasters, including Mr. Thomas Mielke (Oil World), pointed out that with tight expected supplies up to March, this indicates the recent CPO price correction (-11% to RM2,981/MT from a 1-Mar peak of RM3,348/MT) has been overdone. Hence, prices could see a near-term demand and price recovery before a second dip in 2H17. Overall, the experts’ estimates averaged at RM2,669/MT, or only 1.4% above the 2016 average of RM2,631/MT and 4.7% higher than our expected RM2,550/MT. This could be due to forecasters expecting softer production recovery or stronger crude oil prices than our more conservative view.

Bullish CPO factors – slow stock replenishment, narrower crude oil spread, and weather as a catalyst. Among the positive factors cited by exports include slower-than-expected 1H17 production recovery, which could lead to tight stocks up to Apr 2017. Meanwhile, Mr. Mielke noted that the recent price correction has narrowed the CPO price premium to Brent crude oil, which has remained stable at c.USD55/MT. Mr. Dorab Mistry (Godrej International) mentioned that another El Nino event could form in 2017, though the degree of severity is unknown. He also mentioned that while the Indian edible oils crop has a positive outlook for 2017, a potential drought event could hurt production and lead to increased import demand for India in 2018.

Bearish CPO factors – 2H17 recovery, weak soy price outlook, protectionist policy. The consensus view of stronger 2H17 production was upheld, with Dr. James Fry noting the similarities of the recovery with the 98-99 El Nino event and discussing a potential production high of 22.3m MT assuming growth rates matched the 1999 production recovery. Several speakers noted the positive soy production outlook in both North and South America should lead to price weakness towards mid-2017. Mr. Mistry also observed the possibility of protectionist US policies, particularly foreign profits repatriation via tax holidays could dampen emerging market economies as well as commodity prices in general.

Maintain NEUTRAL on Plantation. We reiterate our long-term NEUTRAL position with an updated short-term CPO trading range of RM2,700-2,970/MT (from RM2,850-3,360/MT) implying a smaller CPO-gasoil premium of USD120/MT (from USD150/MT) or +4SD 50-day rolling standard deviation and wider CPO-soybean oil (SBO) discount of USD75/MT (from no discount) or -3SD 50-day rolling standard deviation. We still expect prices to correct in 2Q17, ahead of production recovery, and maintain our FY17E CPO forecast at RM2,250/MT. Should experts’ expectation of a short-term rebound materialize, we expect to see excitement in laggards such as IOICORP (OP; TP: RM5.15) and IJMPLNT (OP; TP: TP: RM3.92). We also like HSPLANT (OP; TP: RM3.00) and UMCCA (OP; TP: RM7.11) for their undemanding valuations and the latter’s above-average production growth potential.

Source: Kenanga Research - 9 Mar 2017