Oct 2017 stocks rose 8% to 2.19m MT, in line with consensus’ 2.21m MT but 4% above our 2.10m MT forecast as production jumped 13% to 2.01m MT, beating consensus’ 1.95m MT and our 1.80m MT estimate. This exceeded higher export of 2% to 1.55m MT (in line with both consensus and our forecast 1.55m MT) as EU recovery was offset by weaker post-festival demand. Looking ahead, we believe the production peak has passed and expect Nov 2017 production to soften 13% to 1.75m MT. Meanwhile, exports should trend down 5% to 1.47m MT on normalizing demand. Overall, with higher supply (1.78m MT) against demand (1.72m MT), we think stocks will creep up by 3% to 2.25m MT in Nov 2017. Price outlook is flat-to-weaker as decent soybean oil (SBO)-CPO premium and weaker production outlook contrasts with a declining USD/MYR rate and rising stocks. Thus, we maintain our FY17-18E CPO price of RM2,700-2,400/MT. We expect a slightly higher 4Q17 CPO price range of RM2,500-2,800/MT (from RM2,450-2,770/MT) reflecting higher SBO and crude oil prices, though this is dampened by lower USD/MYR rate. Our top picks for the sector - PPB (OP; TP: RM18.65) and SAB (OP; TP: RM5.25) are partly shielded from volatility given their integrated operations and diversification. Other calls are maintained, namely OUTPERFORM on IOICORP (TP: RM5.00), TSH (TP: RM2.00), UMCCA (TP: RM7.15), and CBIP (TP: RM2.20); and MARKET PERFORM on SIME (TP: RM9.40), KLK (TP: RM26.35), GENP (TP: RM10.30), FGV (TP: RM1.95), IJMPLNT (TP: RM3.15), HSPLANT (TP: 2.80) and TAANN (TP: RM3.50).

Oct 2017 stocks rise 8% to 2.19m MT, rising for the fourth month in a row. This is in line with consensus’ 2.21m MT expectation, but 4% higher than our forecast 2.10m MT. Production loomed higher at 2.01m MT, a sharp 13% increase compared to consensus’ 1.95m MT (+9% MoM) and our 1.80m MT (+1% MoM) forecasts, likely due to higher working days compared to the previous month. Meanwhile, exports at 1.55m MT (+2% MoM) is in line with consensus and our forecast 1.55m MT. Weaker non-festival demand in China (-27% to 194k MT) and India (- 12% to 166k MT) was offset by better demand from the EU (+85% to 200k MT). Notably, local usage was seasonally higher at +35% to 304k MT due to festivities, though we expect this to normalise in coming months.

Production peak has passed. We believe Oct 2017 production increase of 13% to 2.01m MT represented the peak production for the year, and expect softer production up to January next year with the advent of the monsoon season. Production is likely to soften across all production regions on a monthly basis but we expect YoY growth trend to be sustained between 9-12%, with better production expectation in East Malaysia based on historical year-end performance. Thus, we estimate Nov 2017 production to decline by 13% to 1.75m MT.

Exports to soften 5% to 1.47m MT on lower festival demand. Oct 2017 exports edged up 2% to 1.55m MT, coming in-line with both our and consensus’ forecasts of 1.55m MT. Weaker Chinese (-27% to 194k MT) and Indian (-12% to 166k MT) shipments were offset by strong recovery in EU demand (+85% to 200k MT), as expected previously. However, EU demand should stabilise as September shipments were exceptionally weak at only 109k MT, below even the previous 8-year low of 146k MT in 2009. With normalising demand in the EU and lower festive demand, we expect Nov 2017 demand to weaken 5% to 1.47m MT.

Nov 2017 stocks to rise 3% to 2.25m MT. As supply at 1.78m MT exceeds demand of 1.72m MT, we expect stocks to rise by another 3% to hit 2.25m MT. Production is likely to soften after the peak in October, by -13% to 1.75m MT. As for exports, we think normalising EU demand and lower festival-driven shipments will lead to softer exports of 5% to 1.47m MT. As a result, we expect stocks to remain well above 2.0m MT at +3% to 2.25m MT in Nov 2017.

Catalysts clashing with drawbacks. As potential CPO price catalysts (decent SBO-CPO premium and weaker production) face off with drawbacks (declining USD/MYR rate, rising stocks), we expect prices to be flat-to-lower over the short run. Observe in our chart on page 4 that the SBO-CPO premium had slightly widened to c.USD110/MT as of Nov 2017, against a Sep-Oct 2017 premium of c.USD95/MT, boding well for demand. Meanwhile, production should weaken seasonally, with additional risk of La Nina (50-65% odds, according to US and Australian forecasts), which would be positive to prices. On the other hand, however, with RM-CPO prices positively correlated to USD/MYR rate, the recent appreciation to USDMYR4.20 from USDMYR4.50 in January (please see chart on page 3) could have a negative impact on prices. Also, our previous studies on CPO prices to stock levels indicate that CPO prices tend to drop off as stock levels exceed 2.20m MT, which we expect will occur in Nov 2017. With the clashing positive and negative price drivers, we expect CPO prices to trade somewhat range-bound with a greater possibility of weakness should export survey (a demand indicator) comes in weaker than expected as the month progresses.

Remain NEUTRAL on plantations. In view of the balanced price factors, we reiterate our neutral outlook on the sector with unchanged FY17-18E CPO prices of RM2,700-2,400/MT. We expect 4Q17 CPO prices to trade at a slightly higher range of RM2,500-2,850/MT (from RM2,450-2,770/MT) reflecting higher soybean oil and gasoil price trends although this is dampened by a lower USD/MYR rate. Our top picks for the sector- PPB (OP; TP: RM18.65) and SAB (OP; TP: RM5.25) are partly shielded from potential price volatility given their integrated plantation operations and diversified segments.

Source: Kenanga Research - 13 Nov 2017