Reiterate NEUTRAL with unchanged 2018 CPO price estimate of RM2,400/metric ton (MT). 2017 CPO prices averaged at RM2,791/MT, slightly over our RM2,700/MT forecast by 3.4% as slower-thanexpected production recovery supported prices up to 3Q17. Following the rapid correction in 4Q17 on inventory rebound and a stronger ringgit, we believe prices should remain stable at RM2,400/MT in 1Q18 as the discount to soybean oil (SBO) price and premium to gasoil price have turned favourable. Robust demand would be the key to maintaining prices, however, and we expect stocks levels to pick up from Feb 2018, leading to potential price weakness in 2Q-3Q18 before gradual recovery in 4Q18. Potential catalysts include, in the near term, a moderate-to-severe La Nina event or further support on higher crude oil prices. Our preferred pick is PPB (OP; TP: RM19.00) given the expansions in their own operations while associate Wilmar’s integrated operations should see less earnings risk in a declining CPO price environment. Likewise, we favour integrated players such as IOICORP (OP; TP: RM5.00), SIMEPLT (MP; TP: RM5.50) and KLK (MP; TP: RM25.00) for protection against CPO price downside. We also lower HSPLANT TP to RM2.60 (from RM2.70) with MARKET PERFORM call unchanged on updated Fwd. PER of 17.5x (from 18.1x) with mean valuation basis unchanged. Other calls and TPs are unchanged, namely: FGV (OP; TP: RM2.00), CBIP (OP; TP: RM2.10), SAB (OP; TP: RM4.95), GENP (MP; TP: RM10.30), TSH (MP; TP: RM1.75), TAANN (MP; TP: RM3.60), UMCCA (MP; TP: RM6.80), and IJMPLNT (UP; TP: RM2.50).

Weak 3Q17. 3QCY17 results came in weaker against 2Q17. While three stocks (FGV, PPB and SIME) outperformed and four came in within expectations, seven stocks underperformed consensus estimates namely CBIP, HSPLANT, IJMPLNT, KLK, TSH, UMCCA and SAB. This is much weaker than 2QCY17 with 2 above, 7 within and only 3 below expectations. YoY, average CPO prices received by planters remained higher at an average of 11% to RM2,745/MT while aggregate production growth rose 12% to 14.0m MT. However, planters with high Sabah exposure saw weak or even negative production growth in the area, such as HSPLANT (-4%) and IOICORP (flat), leading to earnings disappointment due to the higher unit cost. While average FY17-18E earnings adjustment was up by 9-3%, it was largely due to the sharp revision for FGV (+172-86%) as it significantly beat consensus and our expectations. Excluding FGV, average earnings adjustment is -4% for both FY17-18E, in line with the high proportion of earnings disappointments.

2017 CPO prices at RM2,794/MT. 2017 CPO prices to-date performed better-than-expected, averaging at RM2,791/MT or 3.4% over our expected RM2,700/MT forecast on the back of slower-than-expected production recovery up to 3Q17, coupled with a weak ringgit through most of the year. As production started to stabilise in 4Q17 leading to stock levels recovering to over 2.0m MT, in tandem with a strengthening ringgit since Nov 2017, CPO prices saw a quick correction, falling 14% since Nov 2017 to c.RM2,400/MT by year end.

Source: Kenanga Research - 4 Jan 2018