Jan 2018 stocks saw an unexpectedly sharp decline of 7% to 2.55m metric tons (MT), well below consensus’ 2.75m MT (+1% Month-on-Month (MoM)) and our estimate of 2.72m MT (-1% MoM). This was due to a surprise jump in exports (+6% to 1.51m MT) compared to consensus and our expected 8% decline to 1.31m MT and 1.32m MT, respectively. Production, however, declined 13% to 1.59m MT, less than forecasted decline of 15% to 1.56m MT. Looking forward, we think production should bottom in Feb 2018 with a 12% decline to 1.40m MT on fewer working days. Meanwhile, the same factor should lead to softer exports by 13% to 1.32m MT, despite solid 11-15% export growth up to Feb-10, as markets soften over the coming festival period. All-in, we forecast Feb 2018 inventory to decline 6% to 2.39m MT, which should improve short-term CPO price sentiment. However, we expect limited upside given the narrowing CPO-soybean oil (SBO) discount of USD90/MT (vs. USD120/MT in 4Q17) and wider downside considering the recent pullback in crude oil prices. As such, we update our 1Q18 CPO price trading range to RM2,200-2,550/MT (from RM2,370-2,575/MT) with unchanged SBO and crude oil discount/premiums. No change to our FY18E CPO price of RM2,400/MT. Reiterate NEUTRAL with a positive short-term bias, but with a soft medium term outlook and decent 4QCY17 prospects, we opine that investors may sell into strength on the sector in the coming weeks. No change to our calls, namely: OUTPERFORM on PPB (TP: RM19.00), IOICORP (TP: RM5.00), FGV (TP: RM2.00), CBIP (TP: RM2.10) and SAB (TP: RM4.95) ; MARKET PERFORM on SIMEPLT (TP: RM5.50), KLK (TP: RM25.75), 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).

Jan 2018 stocks saw a sharper-than-expected decline of 7% to 2.55m metric tons (MT), against consensus’ expectation of a 1% increase to 2.75m MT and our forecasted slight decline of 1% to 2.72m MT. This came as exports unexpectedly rose 6% to 1.51m MT, contrary to both consensus and our expectation of declines to 1.31m MT (-8% month-on-month (MoM)) and 1.32m MT, respectively. India saw a sharp surge in demand, rising 82% to 202k MT, well offsetting softer demand in China (-11%), EU (-10%) and US (-27%). However, production decline of 13% to 1.59m MT was stronger-than-expected against consensus and our forecasted 1.56m MT (-15% MoM), with strong year-on-year (YoY) growth seen in Peninsular Malaysia and Sabah.

Production to bottom in Feb 2018 (-12% to 1.40m MT). Jan 2018 production weakened 13% to 1.59m MT, though this was below consensus and our expected 15% decline to 1.56m MT. All three key regions saw YoY growth against Jan 2017, significantly in Sabah and Peninsula Malaysia,ia which jumped 31% and 30% to 454k and 825k MT, respectively. We believe this is further evidence of recovery from previous years’ droughts, coupled with lesser monsoon weather impact compared to last year, which resulted in less disruption to crop harvesting. Looking ahead, we believe production is likely to continue seeing good YoY growth for the rest of 1H18, particularly in Sabah, although Feb 2018 should continue to see a seasonal MoM decline on lower working days. As such, we forecast Feb 2018 production to soften further by 12% to 1.40m MT, but note that this will likely be the lowest monthly production for the year.

Expect weaker exports (-13% to 1.32m MT) in Feb 2018. Exports were unexpectedly stronger in Jan 2018, rising by 6% to 1.51m MT, contrary to market and our expectations of an export decline of 7-8% in tandem with weaker production. This was led by substantial growth in Indian demand (+82% to 202k MT), possibly on the easing impact from its import duty hikes in Nov 2017. The cut in Malaysian export duties in Jan 2018 may have also contributed to some scattered pickup, with growth seen in Pakistan (+20% to 101k MT) and the rest of the world (+5% to 818k MT). For Feb 2018, we expect demand from India, China and Pakistan to ease post-restocking, while fullmonth volumes may be weaker despite encouraging cargo surveys up to 10-Feb (+14.7% to 412k MT and +10.6% to 421k MT, according to ITS and SGS, respectively) – heading into the Chinese New Year festival season resulting in fewer trading days. Thus, we forecast Feb 2018 exports to weaken 13% to 1.32m MT.

Feb 2018 inventory to decline 6% to 2.39m MT. With supply of 1.42m MT coming in below demand of 1.58m MT, we anticipate lower stocks by 6% to 2.39m MT. Given lower working days in February, we expect to see both lower production (-12% to 1.39m MT) and weaker exports (-13% to 1.32m MT). In anticipation of two months’ inventory draw down, we expect the market to turn more optimistic on palm oil prices, although we continue to expect lower CPO prices especially towards 2H18 as production is slated to rise after February.

Maintain NEUTRAL on plantations with a short-term positive CPO price bias due to likely inventory reductions. However, we think that upside may be limited given the narrowing discount between CPO and soybean oil (SBO) prices, down to c.USD90/MT from c.USD120/MT in 4Q17. Meanwhile, the recent decline in crude oil prices (-5% year-to-date to USD63/barrel) has pushed down the CPO price floor, leading to further downside risk. In view of this, we update our 1Q18 CPO price range to RM2,200-2,550/MT (from RM2,370- 2,575/MT) based on unchanged SBO discount of USD60/MT and crude oil premium of USD100/MT. Given the unexpectedly strong short-term prospect but soft medium-term outlook for CPO prices, coupled with decent earnings prospects in the upcoming 4QCY17 results season (driven by flat CPO prices but recovering production), investors could consider selling into strength on the plantation sector in the coming weeks.

Source: Kenanga Research - 13 Feb 2018