May 2017 stocks declined 3% Month-on-Month (MoM) to 1.56m metric tons (MT), lower than consensus 1.58m MT and our 1.67m MT forecast on higher production (+17% to 1.51m MT), beating consensus (1.46m MT) and our forecast (1.39m MT) on strong festive demand. Production at 1.65m MT was in line with consensus 1.63m MT and our 1.64m MT forecast. Going forward, we think production will take a breather in June, staying flat at 1.65m MT on labour scarcity, while festivals should continue supporting exports (+1% to 1.52m MT). All-in, demand of 1.76m MT should outstrip supply of 1.72m MT for lower June 2017 stocks of 1.52m MT. We adjust our 2Q- 3Q17 CPO trading range to RM2,500-2,700/MT (from RM2,550-2,800/MT) while maintaining FY17E CPO prices at RM2,550/MT. No change to our NEUTRAL call – despite a bearish 2H17 price outlook, we see pockets of value in laggards IOICORP (OP; TP: RM5.50) and above-average producers TSH (OP; TP: RM2.18) and UMCCA (OP; TP: RM7.50). Other calls are maintained; namely OUTPERFORM on PPB (TP: RM19.35), IJMPLNT (TP: RM3.92), and HSPLANT (TP: RM3.00); and MARKET PERFORM on SIME (TP: RM9.50), KLK (TP: RM26.00), GENP (TP: RM12.40), FGV (TP: RM2.10), TAANN (TP: RM4.10) and CBIP (TP: RM2.15).

May 2017 stocks lower than consensus. May 2017 stocks at 1.56m MT (-3% MoM) was lower-than-expected, at 1% below consensus 1.58m MT and 7% below our 1.67m MT estimate. This came on the back of a sharp jump in exports (1.51m MT, or +17% MoM), compared to consensus 1.46m MT (+14% MoM) and our 1.39m MT (+8% MoM), mainly due to strong Ramadan demand which led to a 70% spike in Indian exports to 274k MT, and doubled Pakistan's exports to 108k MT. Meanwhile, production at 1.65m MT (+7% MoM) was 1% above both consensus’s 1.63m MT and our 1.64m MT.

Expect flat June production (1.65m MT). May 2017 production at 1.65m MT was slightly above consensus and our forecasted 1.63m MT and 1.64m MT, respectively, as all three key producing regions (Peninsular Malaysia, Sabah and Sarawak) saw double-digit Year-on-Year (YoY) growth. Looking ahead, we expect June 2017 production to take a breather on lower labour availability over the festive period. While Peninsular Malaysia and Sarawak productions should see YoY growth on drought recovery and maturing area, respectively, Sabah production could be flat-to-weaker YoY on lingering effects from some dryness seen in early-2016. All-in, June 2017 production should be flat, at 1.65m MT. For the medium-term, production remains on a growth track towards a peak in Aug-Oct, and we expect peak production close to 2.00m MT in line with previous years’ trends.

Festivities supporting exports (+1% to 1.52m MT). May 2017 exports rose 17% to 1.51m MT thanks to strong festive demand. This beat both consensus and our positive forecasts of 1.46m MT and 1.39m MT, respectively. Delving into the figures, both India and Pakistan’s demand rose significantly (+70% to 274k MT and +97% to 108k MT, respectively) on Ramadan demand, but Chinese demand remained very soft (-18% to 113k MT) due to competing soy supplies. As Ramadan continues into the month-end, we expect demand to be maintained in June at 1.52m MT (+1%).

Jun 2017 stocks to be trimmed 2% to 1.52m MT. In June 2017, we believe demand at 1.76m MT should outstrip supply at 1.72m MT. We expect production to be flat at 1.65m MT on labour scarcity over the festive period, though we believe festive demand should support demand at 1.52m MT (+1%) particularly in India. All-in, we estimate June 2017 stocks to close at 1.52m MT, or -2% MoM.

Fairer CPO valuations as soybean oil (SBO) premium rises. We adjust our 2Q-3Q17 CPO price range to RM2,500- 2,700/MT (from RM2,550-2,800/MT) on an unchanged CPO-SBO discount of USD80/MT and CPO-gasoil premium of USD100/MT. Despite the recent uptick in soybean oil prices (+4% to USD712/MT from USD684/MT on 2-Jun), we note that the CPO-SBO discount has merely reverted to sustainable levels c.USD80/MT, and hence the SBO price appreciation should have limited positive impact on CPO prices. Longer term, with the continued uptrend in 2H17 production, we expect higher market sensitivity towards export figures impacting price performance. Note that our price-to-stock simulations indicate that flagging exports could well bring prices to a downtrend approaching production cost level or c.RM1,800/MT by year-end.

Maintain NEUTRAL on plantations. We maintain our FY17E CPO forecast of RM2,550/MT with an updated 2Q-3Q17 price range of RM2,500-2,700/MT (from RM2,550-2,800/MT). We see limited upside prospects for CPO prices in 2H17, as rising production offsets a flattish export outlook going forward. Barring external policy catalysts to energise the market, we expect 2H17 CPO prices to come in well below 1H17 year-to-date average of RM2,978/MT. Nevertheless, in the short term, we see pockets of value in planters trading between -2.0SD to -1.0SD valuation - particularly large-cap laggards such as IOICORP (OP; TP: RM5.50), and planters with above-average production TSH (OP; TP: RM2.18) and UMCCA (OP; TP: RM7.50). Despite our bearish 2H17 price view, we believe the downside risk is limited for these counters due to their laggard status, stable fundamentals and positive full-year production outlook.

Source: Kenanga Research - 14 Jun 2017