Mar 2017 stocks increased 7% Month-on-Month (MoM) to 1.55m metric tons (MT), above our and consensus forecast (1.46m MT), due to higher-than-expected imports (102k MT). Production at 1.46m MT (+9% MoM) was above consensus 1.39m MT but met our 1.47m MT estimate, while demand at 1.27m MT was also above consensus (1.18m MT) but within our 1.26m MT forecast. Going forward, we think the production uptrend will continue (+9% to 1.60m MT) on easing drought impact, while exports should also pick up slightly (+3% to 1.30m MT) on restocking and early signs of festive demand. All-in, we expect stocks to increase 10% to 1.60m MT on the back of supply (1.67m MT) exceeding demand (1.53m MT). We continue to expect strong production growth up to the peak in 4Q17, while price is highly dependent on export performance. No change to our FY17E CPO estimate of RM2,550/MT, while 2Q17 trading range is unchanged at RM2,700-2,940/MT. Maintain NEUTRAL on the sector, as limited downside (on range-bound crude oil and strong USD/MYR) is offset by rising palm and soy production trends. We maintain OUTPERFORM on IOICORP (TP: RM5.15), IJMPLNT (TP: RM3.92), HSPLANT (TP: RM3.00) and UMCCA (TP: RM7.50); MARKET PERFORM on SIME (TP: RM9.50), KLK (TP: RM26.00), PPB (TP: RM17.60), GENP (TP: RM12.40), FGV (TP: RM2.10), TSH (TP: RM2.00), and CBIP (TP: RM2.15).

Stocks up on higher imports. Mar 2017 stocks rose 7% to 1.55m metric tons (MT), higher than both our and consensus flat stocks expectation (1.46m MT). Production at 1.46m MT (+16% Month-on-Month (MoM)) was lower than consensus 1.39m MT (+5%) but in line with our 1.45m MT (+15%) estimate. Meanwhile, exports at 1.27m MT (+14%) was higher than consensus 1.18m MT (+7%) but met our expected 1.26m MT (+14%) forecast. Imports at 102k MT however came in well above our and consensus 52k MT, leading to higher-thanexpected closing stocks.

Production uptrend to continue (+9% to 1.60m MT). Mar 2017 production rose 16% to 1.46m MT, which is in line with our 1.45m MT forecast (+15% MoM) though lower than consensus 1.39m MT (+5%). With this degree of increase, we think the post-drought recovery is starting to show, and producers should achieve good monthly growth numbers up to the traditional peak in 4Q. Looking ahead, we think all three key producing areas (Peninsular Malaysia, Sarawak and Sabah) should see good double-digit Year-on-Year (YoY) production growth in Apr 2017, translating to +9% to 1.60m MT.

Exports to edge up (+3% to 1.30m MT). In tandem with production pickup, exports in Mar 2017 improved 14% to 1.27m MT, meeting our 1.26m MT expectation (+15% MoM) and above consensus 1.18m MT (+7%). Indian demand strengthened 28% to 171k MT, which made up for softer EU demand (-12% to 135% MT). With production recovering, restocking activities and the upcoming Ramadan, we expect to see good demand over the next 2-3 months, while stock-to-use ratios should remain stable at c.9% (against the 3-year average of 10%) due to existing low stock levels. For Apr 2017, we estimate exports to improve 3% to 1.30m MT on the back of Indian demand improvement and Chinese restocking.

Stocks to rise 10% to 1.60m MT. We expect supply at 1.67m MT to lead demand of 1.53m MT in Apr 2017. Supply should rise as production improves 9% to 1.60m MT on easing drought effects, especially in Peninsular Malaysia and Sabah. Meanwhile, we expect exports to see a smaller increase of +3% to 1.30m MT largely on better Indian demand and some improvement from China. Overall, we expect Apr 2017 stocks to close higher at +10% to 1.60m MT.

Production recovery to hang over 2017 price trends. In our 2Q17 strategy (published 29-Mar), we noted that the recent price correction has brought prices to more sustainable levels vis-à-vis stocks. Our production scenarios point to a continued production uptrend into Sep-Oct, leaving demand to be the major factor determining stock levels and thus price movements. We believe prices have already peaked in mid-Feb. Assuming exports largely track production movements, we expect a broad but relatively high price range between RM2,700-3,200/MT based on our stock-to-price studies. However, in the event of flagging exports, price outlook is likely to be weak, with consistent price downtrend to a possible low of RM1,800/MT by year-end.

Maintain NEUTRAL on Plantation sector. Although CPO price upside is limited by a strong palm oil and soybean oil production outlook, we continue to think the downside is contained by range-bound crude oil prices and a strong USD/MYR. On the biodiesel front, Indonesian actions to reduce subsidy margins should be favourable to biodiesel production, which offsets the EU’s moves to restrict palm oil biodiesel imports to sustainable sources only. No change to our FY17 CPO forecast of RM2,550/MT and 2Q17E CPO price range of RM2,700-2,970/MT. Assuming status quo, we think planters’ share prices should trade range-bound with lower CPO prices offset by better production-led earnings. However, changes in Indonesian biodiesel policy could benefit Wilmar (and therefore PPB (MP; TP: RM17.60)), while a pickup in Chinese demand could benefit large caps such as SIME (MP; TP: RM9.50), IOICORP (OP; TP: RM5.15) and KLK (MP; TP: RM26.00). Meanwhile, in view of the production uptrend we still prefer planters with above-average growth prospect such as IJMPLNT (OP; TP: RM3.92) and UMCCA (OP; TP: RM7.50).

Source: Kenanga Research - 11 Apr 2017