Feb 2017 stocks came in at 1.46m metric tons (MT) (-5% MoM) which was slightly below consensus’ 1.48m MT but 3% higher than our 1.42m MT forecast due to higher-than-expected production (1.26m MT; -1% MoM) coupled with disappointing exports (1.11m MT; -14% MoM). Local usage, however, surged 46% to 274k MT, likely on festive demand. Looking ahead, we believe production has bottomed in Feb 2017 and expect +15% production growth to 1.45m MT in Mar 2017 on the back of higher number of harvesting days. Meanwhile, a more favorable CPO-soybean oil (SBO) discount at USD85/MT and better supplies should lead to higher exports (+14% to 1.26m MT) in Mar 2017. All-in, we estimate Mar 2017 stocks to be flat at 1.46m MT with supply of 1.50m MT equaling demand. With a better production and softer price outlook, we maintain our NEUTRAL view with unchanged near-term CPO trading range of RM2,700-2,900/MT and FY17E CPO price of RM2,550/MT. We expect CPO prices to correct throughout 2Q17, ahead of a stronger production recovery in 2H17. However, changes in the Indonesian and US biofuels policies could provide price support in the mid-term. No changes to our calls; 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: RM9.50), KLK (TP: RM26.00), PPB (TP: RM17.60), GENP (TP: RM12.40), FGV (TP: RM1.85), TSH (TP: RM2.00), and TAANN (TP: RM4.10).

Feb 2017 stocks slightly under consensus. Feb 2017 inventory level at 1.46m metric tons (MT) (-5% MoM)) was slightly under consensus’s 1.48m MT (-1% difference) but 3% higher than our forecasted 1.42m MT. This was mainly due to higher-than-expected production at 1.26m MT (-1% MoM), or 3% higher than consensus’ 1.22m MT and 10% above our 1.15m MT expectation. Meanwhile, exports disappointed at 1.11m MT, coming in 2% lower than both our and consensus’ 1.13m MT forecasts. Domestic usage, however, saw a surge to 274k MT (+46%), possibly on increased festival demand. All-in, we find the stock numbers mixed, with stock decline being a positive factor; but the lower exports despite higher production do not bode well, and could hurt price sentiment among investors.

March production to pick up (+15% to 1.45m MT). Feb 2017 production performed better than expected at 1.26m MT (-1% MoM), exceeding both consensus (1.22m MT) and our forecast (1.15m MT). All major producing regions saw YoY monthly production growth of between 15-36%, which we think demonstrates some production recovery from the major drought in mid- 2015. Although we understand that early-2016 dryness in Sabah could continue to slow recovery there, we expect Peninsular Malaysia and particularly Sarawak production to see good yearly growth going forward. We believe that Feb 2017 production is the bottom for the year, and expect to see decent growth in the coming months, and a better pickup in 2H17. With higher harvesting days, we believe Mar 2017 production should see a good pickup of +15% to 1.45m MT.

Expect exports pickup (+14% to 1.26m MT). Exports in Feb 2017 fell 14% to 1.11m MT, weaker than both our and consensus forecasts of 1.13m MT. China exports fell the most (-38% to 103k MT) on weaker post-festival purchases. Going forward, post CPO price correction, we observe a more favourable CPO to soybean oil (SBO) discount averaging USD85/MT month-to-date (MTD), compared to Feb 2017 average of USD17/MT. Combined with a better supply picture, we think demand for CPO should start to normalise going forward. Hence, for Mar 2017 we expect exports to improve 14% to 1.26m MT.

Stocks likely flat at 1.46m MT. In Mar 2017 we expect supply at 1.50m MT to match equal demand of 1.50m MT. Higher number of harvesting days and the bottoming of production in Feb 2017 could lead to higher CPO production of 1.45m MT. Meanwhile, a more attractive CPO-SBO discount and better supplies should help demand to improve by 14% to 1.26m MT. Local demand is likely to revert to a normal range of 236k MT post-festival season. Overall, we expect Mar 2017 stocks to close flat at 1.46m MT.

Maintain NEUTRAL on the sector. We remain NEUTRAL on Plantation with an unchanged near-term trading range of RM2,700-2,970/MT. Recall in our recent note on the Bursa Palm Oil Conference 2017 (published 9-March) that we expect prices to correct, likely throughout 2Q17 – ahead of production recovery in 2H17. Nevertheless, with relatively low stocks and a decent demand outlook, we expect prices to remain well-supported above RM2,700/MT until stocks begin to show an uptrend later in 2Q17. Heading into 2H17, potential price support factors include an update to Indonesia’s biofuel policy (ie: reduction of subsidy per tonne to blenders) and weather disruption in edible oil-producing countries. Risks include a rapid production recovery in both Malaysia and Indonesia and price weakness in soy due to ample production.

Source: Kenanga Research - 13 Mar 2017