Jun 2017 stocks softened 2% Month-on-Month (MoM) to 1.53 metric tons (MT), below consensus’ 1.56m MT forecast but meeting our 1.52m MT estimate. Production saw a sharper-than-expected drop (-8% to 1.51m MT) as compared to consensus’ 1.62m MT and our 1.65m MT forecast, while exports at 1.38m MT was in line with consensus’ 1.38m MT but below our 1.52m MT forecast. Looking ahead, we expect production to recover 12% to 1.70m MT on labour improvement, while exports should also rise, by 4% to 1.43m MT largely on stock replenishment. Overall, Jul 2017 stocks are seen rising 5% to 1.63m MT as supply of 1.75m MT beats demand of 1.67m MT. No change to our FY17E CPO price of RM2,550/MT and 3Q17 trading range of RM2,500-2,700/MT. Reiterate NEUTRAL as we expect Year-on-Year (YoY) earnings improvement, while softer CPO prices are accounted for in estimates. Still OUTPERFORM on IOICORP (TP: RM5.50), PPB (TP: RM19.35), IJMPLNT (TP: RM3.60), TSH (TP: RM2.20), HSPLANT (TP: RM2.90) and UMCCA (TP: RM7.70); MARKET PERFORM on SIME (TP: RM9.50), KLK (TP: RM26.56), GENP (TP: RM12.40), FGV (TP: RM1.85), TAANN (TP: RM3.60) and CBIP (TP: RM2.20).

Jun 2017 stocks at 1.53m MT (-2% MoM) came in below consensus’ 1.56m MT, but in line with our 1.52m MT forecast. This was mainly due to weaker-than-expected production at 1.51m m MT (-8% MoM) compared to consensus’ 1.62m MT and our 1.65m MT estimate. Sabah particularly saw a year-on-year (YoY) production drop of 7%, the first such decline since Jan 2017. Meanwhile, exports at 1.38m MT (-8%) was in line with consensus’ 1.38m MT but weaker than our estimated 1.52m MT forecast. The weakness was likely caused by the corresponding poor production as well as weaker post-festival demand.

Jul 2017 production to rise 12% to 1.70m MT. Jun 2017 production softened 8% to 1.51m MT, close to the 5-year historical average of 1.55m MT. We believe this was due to lower labour availability in the holiday season, as well as lingering production impact in Sabah from mid-2016 dryness, resulting in a YoY production decline. Looking ahead, we believe planters in Peninsular Malaysia and Sarawak should see good YoY growth. The former is due for recovery in view of its double-digit YoY production declines between Mar-Oct 2016, while the latter was less affected by droughts and should see production growth thanks to its young average age. As a result, for Jul 2017, we estimate production to improve 12% to 1.70m MT.

Expect Jul 2017 export improvement (+4% to 1.43m MT). Post festivities, Jun 2017 exports weakened 8% to 1.38m MT with substantially weaker demand in China (-39% MoM to 69k MT) and softer Indian demand (-13% to 238k MT) post festival season. This was only partly offset by better Pakistani demand (+14% to 124k MT) and US (+24% to 48k MT). Looking ahead, we think India and Pakistan could see weaker demand until the coming Diwali festivities in mid-Oct 2017. Overall, we expect slight improvement of exports by 4% to 1.43m MT, largely due to stock replenishments as production recovers.

Jul 2017 stocks to rise 5% to 1.63m MT. All-in, we estimate supply at 1.75m MT to exceed demand at 1.67m MT. Production should improve on labour improvement and the start of seasonal production upswing to 1.70m MT. Meanwhile, exports should also see some increase on stock replenishment activity, at +4% to 1.43m MT. Overall Jul 2017 stocks should see an increase of 5% to 1.63m MT, or unchanged stock-to-use ratio of 8.1% (from 8.0% in Jun 2017).

Positive price effect likely to be short-lived. While the production and inventory decline in June is a positive surprise for CPO prices, we expect this effect to be short-lived as we continue to forecast production uptrend in 3Q17. Recall in our sector strategy note published 6 July 2016 mentioning that 2Q17 CPO price performance has mostly tracked our bearish projections vis-à-vis stock movements, and a weak outlook could see CPO price downtrend of up to RM1,800/MT by year-end. As a result, our CPO price-based PER model suggests planters’ share prices downside of c.7% at CPO prices of RM2,200/MT and downside of c.13% should CPO prices tack down to RM1,800/MT.

Reiterate NEUTRAL as earnings improve on production recovery. Our FY17E CPO price is unchanged at RM2,550/MT while 3Q17 price range is also maintained at RM2,500-2,700/MT on a basis of CPO-SBO discount of USD80/MT and CPOgasoil premium of USD100/MT. We remain neutral on the sector as the weaker CPO price outlook has already been incorporated into our earnings forecast, which we expect to still see improvement YoY due to rising production, which allows for lower production cost per ton. In a declining price environment, we think big-caps with downstream facilities such as IOICORP (OP; TP: RM5.50), KLK (MP; TP: RM26.56) and PPB (OP; TP: RM19.35) through its associate, Wilmar, should benefit from lower input costs. We also like efficient planters with above-average production outlook such as IJMPLNT (OP; TP: RM3.60), TSH (OP; TP: RM2.20) and UMCCA (OP; TP: RM7.70) to offset a weaker price environment

Source: Kenanga Research - 11 Jul 2017