Dec 2017 stocks rose for the sixth month in a row, to 2.73m MT, above consensus (2.69m MT) and our forecasted 2.68m MT. Production softened by 6% to 1.83m MT, close to consensus (1.85m MT) but well above our forecasted 1.67m MT, signifying stabilizing production. Exports rose 5% to 1.42m MT, slightly under consensus (1.47m MT) but above our 1.31m MT estimate on a favorable CPO discount to soybean oil (SBO). We expect Jan 2018 production to continue weakening (-15% to 1.56m MT) on wet weather and seasonal downtrend, while exports should also soften 7% to 1.32m MT on lesser availability and slightly narrower SBOCPO discount. Overall, we expect supply of 1.58m MT to balance out demand of 1.60m MT for flattish Jan 2018 stocks of 2.71m MT. Despite optimism on the recent Malaysian government suspension of palm oil export duty, we believe price impact may be flat as potentially better demand is offset by the strengthening ringgit and recovering production. We update our 1Q18 CPO price trading range to RM2,370-2,575/MT (from RM2,400- 2,620/MT) with unchanged SBO and crude oil discount/premiums. No change to our FY18E CPO price of RM2,400/MT. Reiterate NEUTRAL with less short-term price downside given a decent CPO-SBO discount and short-term production downtrend. However, full-year outlook remains weak on production resurgence. We continue to favour integrated plantation companies such as PPB (OP; TP: RM19.00) and IOICORP (OP; TP: RM5.00) given their earnings stability. Other calls are maintained, namely OUTPERFORM on FGV (TP: RM2.00), CBIP (TP: RM2.10) and SAB (TP: RM4.95) ; MARKET PERFORM on SIMEPLT (TP: RM5.50), KLK (TP: RM25.00), GENP (TP: RM10.30), TSH (TP: RM1.75), HSPLANT (TP: 2.60), TAANN (TP: RM3.60) and UMCCA (TP: RM6.80), and UNDERPERFORM on IJMPLNT (TP: RM2.50).

Dec 2017 stocks rose 7% to 2.73m MT for the sixth month in a row, hitting the highest level since Nov 2015 (2.91m MT). This is 2% higher than both consensus forecast (2.69m MT) and our estimated 2.68m MT. Production at 1.83m MT declined 6% month-on-month (MoM), close to consensus’ expected 1.85m MT (-5% MoM) but far above our expected production decrease of 14% MoM to 1.67m MT by 10%, perhaps signifying production stabilisation after the swings of previous years’ droughts. Exports improved 5% to 1.42m MT, slightly below consensus’ expected 1.47m MT and 8% higher than our 1.31m MT (-3% MoM) forecast owing to a good improvement in EU demand (+35% to 209k MT) which could be attributed to a more favourable palm oil discount against soybean oil.

Jan 2018 production to soften (-15% to 1.56m MT). Dec 2017 production softened 6% to 1.83m MT, in line with consensus’ 1.85m MT but 10% higher than our expected sharp decline to 1.67m MT. Peninsular Malaysia and Sabah production saw less decline of 5% to 995k MT and 490k MT, which could indicate stabilising production in the two regions more strongly affected by droughts in 2015-16. Comparatively, Sarawak saw a monthly decline of 9% to 310k MT which is largely in line with historical year-end production trends for the area. Looking ahead, we expect Jan 2018 production to decline 15% to 1.56m MT as wetter weather disrupts harvesting.

Exports to decline 7% to 1.32m MT. For Dec 2017, exports saw decent growth of 5% to 1.42m MT, slightly below consensus’ 1.47m MT forecast but well exceeding our 1.31m MT estimate. EU demand saw the strongest growth among key regions, rising 35% to 209k MT, likely on a favourable soybean oil (SBO) to CPO discount of USD140/MT, compared to the full-year average of c.USD90/MT. Going forward, we estimate Jan 2018 exports to soften by 7% to 1.33m MT on lesser availability due to softer production, though this would be partly offset by ample existing inventories. We note also that the SBO-CPO discount has narrowed slightly to c.USD115/MT, although this remains fairly reasonable compared to the 2017 discount.

Jan 2018 inventory to stay flat at -1% to 2.71m MT. As supply of 1.58m MT balances out demand of 1.60m MT, we expect stocks to remain relatively flat at 2.71m MT (-1%). We expect production to see seasonal decline compounded with wetter weather for a reduction of 15% to 1.56m MT. As for exports, we think demand should soften 7% on lower supply and slight narrowing of the SBO-CPO discount. Overall, we calculate Jan 2018 stocks to stay largely flat at 2.71m MT (-1% MoM).

Inconclusive price impact on export duty suspension. The Malaysian government announced a three-month suspension of palm oil export taxes effective 8-Jan to increase the competitiveness of Malaysian palm oil, which would be scrapped should stocks decline to under 1.60m MT (which we view as highly unlikely). While the market response has been positive, we have yet to see a strong positive price impact in recent days, as this coincided with a continued strengthening of the ringgit to USDMYR4.00 as of 10-Jan from USDMYR4.05 as of end-2017. While the announcement may spur demand in price-sensitive markets such as India, Pakistan and China, this is balanced by a recovering production outlook and strengthening ringgit, thus rendering the net price effect likely flattish and potentially negative towards the end of the suspension period during the first leg of 2018 production uptrend.

Reiterate NEUTRAL with limited short-term downside. We expect CPO prices to continue trading sideways in the near term with a 1Q18 CPO price range of RM2,370-2,575/MT (from RM2,400-2,620/MT) based on unchanged SBO discount of USD60/MT and crude oil premium of USD100/MT. We see less short-term price downside with its reasonable discount to SBO price and seasonal production downtrend. However, with broad expectations of production resurgence in 2018, we expect mid-to-long-term prices to see weakness. As such, we continue to favour integrated plantation companies such as PPB (OP; TP: RM19.00) and IOICORP (OP; TP: RM5.00).

Source: Kenanga Research - 11 Jan 2018