Nov 2017 stocks increased 16% to 2.56m MT, rising for the fifth month in a row. This is 2% above both consensus 2.50m MT and 13% higher than our 2.23m MT forecast as demand softened 12% to 1.35m MT, disappointing consensus 1.45m MT and our 1.47m MT estimate. Production softened 3% to 1.94m MT, coming in below consensus’ expected flat production but higher than our forecast 1.47m MT on continued post-drought recovery. Looking ahead, we expect production to continue softening on seasonal decline by 14% to 1.67m MT, compounded by the monsoon season and confirmed La Nina. Meanwhile, exports should also soften 3% to 1.31m MT on normalizing demand. Overall, as supply of 1.70m MT exceeds demand of 1.58m MT, we expect stocks to rise another 5% to 2.68m MT. Nevertheless, CPO prices should see less downside after correcting against soybean oil (SBO) for current discount levels at USD140/MT – close to historical average and higher than the year-to-date average of USD85/MT. Crude oil price increases are similarly supportive. We update our 4Q17 CPO price trading range to RM2,400-2,620/MT (from RM2,500-2,800/MT) with unchanged SBO and crude oil discount/premiums. No change to our FY17-18E CPO price of RM2,700-2,400/MT. Reiterate NEUTRAL on the sector as higher stocks outlook is offset by limited CPO price downside.

Our top picks for the sector - PPB (OP; TP: RM19.00) and SAB (OP; TP: RM4.95) are partly shielded from volatility given their integrated operations and diversification. Other calls are maintained, namely OUTPERFORM on IOICORP (TP: RM5.00), FGV (TP: RM2.00), UMCCA (TP: RM7.15), and CBIP (TP: RM2.10); MARKET PERFORM on SIME (TP: RM9.65), KLK (TP: RM25.00), GENP (TP: RM10.30), TSH (TP: RM1.75), HSPLANT (TP: 2.70) and TAANN (TP: RM3.60) and UNDERPERFORM on IJMPLNT (TP: RM2.50).

Nov 2017 stocks rose 16% to 2.56m MT, the fifth such hike in a row. This was higher than both consensus 2.50m MT estimate by 2% and our 2.23m MT forecast by some 13%. Exports disappointed at 1.35m MT (-12% month-on-month (MoM)), which was lower than consensus (1.45m MT) and our forecast (1.47m MT) by 7% and 8%, respectively, on poor India (-40% MoM) and EU (-23% MoM) demand post-festive demand. Production was slightly weaker (-3% MoM) at 1.94m MT, which was 3% lower than consensus’ expected flat production, but well over our post-peak expectation of 1.75m MT by 11%. We take this as a sign of continued postdrought recovery, though we expect production to continue trending downward seasonally in the next few months.

Production to weaken further (-14% to 1.67m MT). Nov 2017 production declined slightly (-3% to 1.94m MT), though it exceeded our expected 1.75m MT estimate but missed consensus’ flat expectation (2.01m MT). Peninsular Malaysia and Sarawak production softened 4% and 8%, respectively, but Sabah saw slight improvement at +2%, marking the 3rd month in a row of production increase for the state. Looking ahead, we expect to see production soften across the board this December as we enter the height of the monsoon season in the East Coast and Sarawak, while La Nina has been confirmed by the Australian Bureau of Meteorology as of its 5-Dec outlook. However, “climate models suggest this La Niña will be weak and short-lived”, meaning that price impact could be limited. Nevertheless, with increased rainfall potentially disrupting fruit collection, we expect production to decline 14% to 1.67m MT in Dec 2017.

Exports to soften 3% to 1.31m MT. Nov 2017 exports weakened by 12% to 1.35m MT, coming in below both our expected 1.47m MT and consensus’ forecasted 1.45m MT as demand fell after the festival season and EU shipments normalised. Indian (-40% to 100k MT) and Pakistan (-25% to 94k MT) demand weakened while EU demand declined 23% to 155k MT. Looking ahead, we think export demand would moderate with slight recovery in India and EU offsetting softer demand from other key regions. As such we forecast Dec 2017 exports to soften 3% to 1.31m MT.

Dec 2017 stocks to rise 5% to 2.68m MT. With supply of 1.70m MT coming in above demand of 1.58m MT, we forecast stocks to increase by another 5% to 2.68m MT. Production will likely weaken further by 14% to 1.67m MT on wetter weather expectations. Meanwhile, exports could remain lacklustre at -3% to 1.31m MT. All-in, we expect stocks to far exceed the 2.0m MT mark for the time being, at 2.68m MT.

Maintain NEUTRAL on plantation sector, with minimal downside on CPO prices at this level. No change to our FY17-18E CPO price of RM2,700-2,400/MT. We maintain our neutral outlook for the sector as we think that despite a rising stock outlook, CPO price downside is limited at this juncture, having corrected against soybean oil prices (SBO) and being supported by higher crude oil prices. We update our 4Q17 CPO price range to RM2,400-2,620/MT (from RM2,500-2,800/MT) with unchanged SBO and crude oil premium of USD100/MT. We think that the recent CPO price correction (from a 4Q17 peak of RM2,871/MT in mid-Sep 2017) to RM2.383/MT as of 11-Dec has brought prices to a much more sustainable level where CPO prices are now trading closer to a USD140/MT discount to SBO prices, or close to the historical average. With a better discount currently compared to the year-to-date average of c.USD85/MT, demand should also start to see some revival, especially later in the month and early next year as Chinese New Year demand starts to trickle in. In view of recent price volatility, however, we continue to favour diversified plantation companies with integrated upstream and downstream operations such as PPB (OP; TP: RM19.00) and SAB (OP; TP: RM4.95).

Source: Kenanga Research - 13 Dec 2017