Apr 2017 stocks rose 3% Month-on-Month (MoM) to 1.60m metric tons (MT), meeting our 1.60m MT estimate but below consensus’ 1.65m MT as production (1.55m MT) came in below consensus (1.60m MT). However, exports (1.28m MT) were below consensus’ 1.31m MT as well. Looking ahead, we expect continued production improvement (+6% to 1.64m MT) on drought recovery, while exports should pick up (+8% to 1.39m MT) on festival demand. Overall, higher supply (1.71m MT) against demand (1.64m MT) should lead to higher stocks (+4% to 1.67m MT). We adjust our 2Q17 CPO trading range to RM2,550-2,800/MT (from RM2,700-2,900/MT) while FY17E CPO prices are maintained at RM2,550/MT. Reiterate NEUTRAL on plantations. A rising production outlook is increasingly dependent on demand factors, particularly government policies. However, near-term CPO prices still supportive to planters’ margins. Maintain OUTPERFORM on IOICORP (TP: RM5.15), PPB (TP: RM19.35), IJMPLNT (TP: RM3.92), HSPLANT (TP: RM3.00) and UMCCA (TP: RM7.50); MARKET PERFORM on SIME (TP: RM9.50), KLK (TP: RM26.00), GENP (TP: RM12.40), FGV (TP: RM2.10), TSH (TP: RM2.00), TAANN (TP: RM4.10) and CBIP (TP: RM2.15).

Apr 2017 stocks lower than consensus. Apr 2017 stocks came in at 1.60m metric tons (MT) (+3% Month-on-Month), spot on with our forecast (1.60m MT) but lower than consensus’ 1.65m MT. This largely came from weaker-than-expected production of 1.55m MT (+6% MoM) against our 1.60m MT and consensus’ 1.59m MT. However, exports were slightly softer than expected at 1.28m MT (+1%) compared to ours (1.30m MT) and consensus’ (1.31m MT) estimates. This was partly offset by a pickup in local demand at 272k MT (+32%), compared to our 268k MT and consensus’ 259k MT forecast. Overall we think the market effect of inventory numbers may be muted, as lower-than-expected production and stock figures are offset by weaker-than-expected export demand. However, initial May export figures appear encouraging (+13% as of 10-May), which might provide short-term optimism to CPO prices.

May production to maintain uptrend (+6% to 1.64m MT). Although Apr 2017 production at 1.55m MT (+6%) was weaker than our 1.60m MT and consensus’ 1.59m MT, we note that production was higher Year-on-Year (YoY) at all three key producing regions, as both Peninsular Malaysia and Sabah production rose 20%, while Sarawak production rose 16%. For May 2017, we expect key regions to continue reporting double-digit YoY production growth as trees continue recovering from 2015 droughts, though we expect to see a potential ‘rest’ month in June where production slows down seasonally. All-in, we estimate May 2017 production to pick up another 6% to 1.64m MT.

Ramadan demand to support May exports (+8% to 1.39m MT). Apr 2017 exports continued to be fairly soft at 1.28m MT (+1%), missing our estimated 1.30m MT and consensus’ 1.31m MT. However, we think demand should pick up with the upcoming festivities as Ramadan begins end-May to June this year. We also note that cargo surveyors are posting supportive export data for the first 10 days of May, with ITS reporting +13% to 347k MT and SGS +15% to 359k MT. Hence, we estimate that May 2017 exports will improve 8% to 1.39m MT.

May 2017 stocks to edge up 4% to 1.67m MT. For May 2017, we estimate supply at 1.71m MT to beat demand of 1.64m MT. Production should continue seeing double digit YoY growth as drought effect fades, resulting in higher May 2017 production of 1.64m MT. Meanwhile, festival demand should support exports for May, at 1.38m MT. Overall, we forecast May 2017 stocks to continue rising 4% to 1.67m MT.

Demand still the major price concern. We adjust our 2Q17 CPO price range to RM2,550-2,800/MT from RM2,700-2,970/MT as we tweak our CPO-gasoil rolling premium to USD100/MT (from USD120/MT), which is in line with the lower subsidy amount for Indonesian biodiesel that has been floated by media and industry sources. We also adjust our CPO-soybean oil (SBO) discount to USD80/MT (from USD75/MT), maintaining our -3SD 50-day rolling standard deviation method. Going forward, as production continues its uptrend, we expect demand strength to be an increasingly important price factor in the months ahead. While our current price range should provide planters with a reasonable margin against production costs, we note that flagging exports could well bring prices on a downtrend approaching production cost level or RM1,800/MT by year-end.

Reiterate NEUTRAL on plantations with no change to our FY17E CPO forecast of RM2,550/MT and an updated 2Q17 price range of RM2,550-2,800/MT (from RM2,700-2,970/MT). With rising production outlook, CPO prices are increasingly dependent on demand drivers, particularly on the government policy side, including factors such as Indonesian biodiesel, EU sustainability requirements, and US trade policies. However, we think near-term CPO prices remain fairly supportive to planters’ margins. In view of the sector-wide production uptrend we still prefer planters with efficient cost structure and above-average growth prospect such as IOICORP (OP; TP: RM5.15), HSPLANT (OP; TP: RM3.00), IJMPLNT (OP; TP: RM3.92) and UMCCA (OP; TP: RM7.50).

Source: Kenanga Research - 12 May 2017