Sep 2017 stocks rose 4% to 2.02m MT, in line with consensus’ 2.00m metric ton (MT) forecast but 4% lower than our 2.10m MT estimate. This marks the first time stocks have crossed the 2.0m MT psychological threshold since Feb 2016. Production softened 2% to 1.78m MT, or 3% under consensus’ 1.83m and 6% below our 1.90m MT forecast on the back of wetter weather leading to slower harvesting progress. Meanwhile, exports edged up 2% to 1.52m MT though this fell short by 6% of consensus’ 1.61m MT and 4% of our 1.58m MT expectation as European exports plunged 39% to 109m MT, which offset stronger Chinese exports of +42% to 275k MT.

Production to inch up 1% to 1.80m MT. Sep 2017 production was fairly slow, softening 2% to 1.78m MT, possibly on wetter weather limiting harvesting days. Production was largely flat across key regions, with Peninsular Malaysia seeing the least decline at -1% to 970k MT followed by Sabah at -2% to 424k MT and Sarawak at -3% to 368k MT. Looking ahead, based on our discussions with planters, we think that production may remain flattish over the next 2 months, with no clear monthly peak compared to historical trends. We think October production could edge up another 1% to 1.80m MT representing an increase of 1%.

Flattish export outlook (+2% to 1.55m MT). Exports in Sep 2017 saw slight improvement of +2% to 1.52m MT, coming in short of consensus’ 1.61m MT by 6% and our 1.58m MT by 4% due to a sharp drop in EU demand (-39% to 109k MT) and other countries (-6% to 774k MT) which was offset by improvements in China (+42% to 275k MT) and Pakistan (+86% to 128k MT). Going forward, we expect exports to China, India and Pakistan to trend down especially in late October post-festival season. However, we think the EU demand was well below average and should see some recovery going forward. With better palm oil availability on stock increases, we expect slightly better exports at +2% to 1.55m MT in Oct 2017.

Oct 2017 stocks to increase 4% to 2.10m MT. With supply at 1.84m MT outweighing demand of 1.77m MT, we think stocks will end higher at +4% to 2.10m MT. Production may remain flat over the quarter with no clear peak season, leading to only +1% to 1.80m MT in Oct 2017. Meanwhile, for exports, EU demand should see some recovery offsetting potential weakness in later part of Oct from China, India and Pakistan. Thus, we forecast export growth of +2% to 1.55m MT. Overall, we expect stocks to increase 4% to 2.10m MT, likely maintaining above the 2.0m MT threshold until early next year.

Time to watch the discount? With the ending of major festival seasons in October, we expect demand to be driven more by the competitiveness of CPO prices against its closest competitor, soybean oil (SBO) prices. In recent weeks, SBO prices have corrected from USD778/MT on 6-Sep to USD726/MT currently, or by 6.7%. However, against the same period, CPO prices were actually flat at -0.2% to USD644/MT. As a result, the CPO discount to SBO has narrowed by some 38.0% to USD82/MT (from USD132/MT). This could well have a dampening effect on CPO demand, especially as USA soybean harvest season gets underway from Oct-Nov, lending support to our bearish outlook on CPO prices for 4Q17 at RM2,500/MT.

Reiterate NEUTRAL on plantations. In spite of our price outlook, we maintain our neutral call on the sector with no change to our FY17-18E CPO price forecast of RM2,700-2,400/MT as we expect solid earnings contribution in the coming quarters on the back of sustained high CPO prices to-date. We reiterate our 4Q17 average price estimate of RM2,500/MT with a wider trading range of RM2,450-2,770/MT as we shrink our SBO-CPO discount estimate to USD70/MT (the 3-month low) from USD125/MT, as well as decreasing our CPO-gasoil premium to USD90/MT (the 3-month low) from USD100/MT. We continue to expect some price volatility ahead given demand risks. Our top picks for the sector, PPB (OP; TP: RM18.65) and SAB (OP; TP: RM5.25) are partly shielded from the volatility given their integrated plantation operations and diversified segments.

Source: Kenanga Research - 11 Oct 2017