Aug 2017 inventory rose for the 4th month running, by 9% to 1.94m metric tons (MT), within 1% from our 1.96m MT estimate but lower than consensus 2.00m MT forecast. Production was flat (-1%) at 1.81m MT as production took a breather from the sharp jump in July (+21%) but demand improved by 6% to 1.49m MT with better demand from India (+14%) and other countries (+16%) offsetting softer EU demand (-17%). In Sep 2017, we expect continued seasonal uptick for higher production (+5% to 1.90m MT) while demand should improve on better availability and year-end festive demand (+6% to 1.58m MT). Overall, we expect Sep 2017 supply at 1.95m MT to outstrip demand at 1.79m MT leading stocks to close above the 2.0m MT psychological barrier at 2.10m MT. We maintain our NEUTRAL sector call with unchanged FY17E CPO price of RM2,550/MT and a slightly wider 3Q17 CPO trading range of RM2,500-2,750/MT (from RM2,500-RM2,700/MT) on soybean discount expansion to USD125/MT (from USD100/MT). In a bearish 2H17 price outlook environment, we see value in downstream players such as IOICORP (OP; TP: RM5.25) and PPB (TP: RM18.90) on cheaper feedstocks. Other calls are maintained, namely OUTPERFORM on IJMPLNT (TP: RM3.30), TSH (TP: RM2.20), HSPLANT (TP: RM3.00), UMCCA (TP: RM7.60) and CBIP (TP: RM2.20); and MARKET PERFORM on SIME (TP: RM9.50), KLK (TP: RM26.40), GENP (TP: RM11.00), FGV (TP: RM1.60), and TAANN (TP: RM3.65).

Aug 2017 stock level rose 9% to 1.94m MT, 3% below consensus 2.00m metric tons (MT) estimate but only 1% shy of our estimated 1.96m MT forecast. Production was flat (- 1%) at 1.81m MT, close to consensus 1.83m MT but falling short of our 1.96m MT forecast by 7% as August production took a breather from July’s sharp 21% jump. Meanwhile, exports improved 6% to 1.49m MT, beating consensus 1.40m MT by 6% but short of our 1.61m MT estimate by 7%. Better demand in India (+14% to 183k MT) and other countries (+16% to 821k MT) was offset by weak exports to the EU (-17% to 177k MT).

Rising production trend to continue (+5% to 1.90m MT). Aug 2017 production was flat at 1.81m MT, taking a breather from the sharp 21% monthly jump in Jul 2017. Seasonal production upswing was on track only in Sarawak (+4% to 392k MT) as production took a breather in Peninsular Malaysia (-1% to 980k MT) and dipped in Sabah (-5% to 438k MT). Looking ahead, we expect to see growth across the board, in line with the historical production trend. Furthermore, planters in recent briefings have indicated a positive production outlook over the next quarter, with production peak expected in Sep-Oct based on their bunch counts. Thus, for Sep 2017, we expect to see production increase by 5% to 1.90m MT.

Export to trend up (+6% to 1.58m MT). For Aug 2017, exports ticked up 6% to 1.49m MT, or 6% higher than consensus 1.40m MT estimate but 7% below our 1.61m MT forecast. Exports to India improved 14% to 183k MT, but this was offset by weaker demand in the EU (-17% to 177k MT). Other countries with limited local oilseed production in the Middle East and Asia posted encouraging demand growth, such as Iran (+3.3x to 61k MT), Turkey (+65% to 70k MT), Japan (+39% to 60k MT) and Philippines (+7% to 61k MT) likely on pre-festival stocking-up activities. For Sep 2017, we expect to see flattish demand in China but improvement in India as it digests the recent hike in palm oil import duties to meet the upcoming Diwali demand. As such, overall demand should tick up by 6% to 1.58m MT.

Sep 2017 Stocks poised to cross above 2.0m MT. We expect the continued rising supply at 1.95m MT to outweigh demand of 1.79m MT. On the production side, planters’ guidances are pointing to continued upswing, with our estimate at +5% to 1.90m MT in Sep 2017. Meanwhile, year-end festivities and better production availability should lead to better export demand (+6% to 1.58m MT). Even so, the higher supply should push the month-end stock level higher to close above the psychological 2.0m MT mark at +8% to 2.10m MT by Sep 2017.

Higher volatility ahead? In spite of higher YTD production at 12.35m MT (+14% YoY), exports have only risen 2% to 10.7m MT over the same period, leading to stock normalisation. We observe that prices tend to hold above RM2,600/MT at stock levels up to 2.20m MT, but beyond that level, prices tend to decline substantially, down to RM2,100-RM2,300/MT, when stock levels exceed the 2.20m MT mark (refer to our chart on page 5). While other price factors may also contribute to this downtrend, we believe investors may wish to adopt caution in view of a rising stock outlook in late-3Q/ early 4Q17.

Maintain NEUTRAL as better earnings offset softer price outlook. No change to our FY17E CPO forecast of RM2,550/MT with a narrower 3Q17 price range of RM2,500-2,750/MT (from RM2,500-2,750 MT) on a wider CPO-SBO discount of USD125/MT (from USD100/MT) at the 3-month average, and an unchanged CPO-gasoil premium of USD100/MT. While we anticipate further price volatility in the coming months, we maintain our overall neutral outlook as we expect to see solid earnings improvement among planters on higher YoY CPO prices and better production. Although we expect sluggish interest in planters in a declining price environment, earning-wise, we believe big-caps with downstream facilities such as IOICORP (OP; TP: RM5.25) and PPB (OP; TP: RM18.90) through its associate Wilmar, should benefit from lower input costs.

Source: Kenanga Research - 12 Sept 2017