Feb 2018 stocks declined 3% to 2.48m MT, less than consensus’ expected -7% and our estimated -6%. This came despite weaker-than-expected production (-15% to 1.34m MT) as imports surged (+93% to 67k MT) and local usage slid (-41% to 170k MT). Exports at 1.31m MT (-13%) was close to consensus estimates (-12% to 1.33m MT) and our forecast (-13% to 1.32m MT). Going forward, we expect production to trend upwards, by +17% to 1.57m MT in Mar 2018. Meanwhile, exports should track up 3% to 1.35m MT with general demand improvement dragged by weaker Indian buying on newly imposed tariffs. Overall, we expect Mar 2018 production to rise slightly, at +1% to 2.50m MT, as supply (1.61m MT) edges out demand (1.59m MT) with normalizing imports and local usage. CPO prices are likely to face headwinds on production uptrend, leading us to tweak down our short-term trading range to RM2,200-2,500/MT (from RM2,200-2,550/MT) on unchanged CPO-soybean oil discount of USD60/MT and CPO-gasoil premium of USD100/MT. Our FY18 forecast is unchanged at RM2,400/MT. We remain NEUTRAL on the sector as planters should see decent margins at this CPO price level, while rising production should help streamline unit costs. We still prefer PPB (OP; TP: RM19.85) on its change in Sugar strategy, while higher Indonesian biodiesel quotas should support the Tropical Oils segment. Other calls are unchanged, namely: OUTPERFORM on GENP (TP: RM10.75); MARKET PERFORM on SIMEPLT (TP: RM5.90), IOICORP (TP: RM5.15), KLK (TP: RM25.75), FGV (TP: RM2.00), TSH (TP: RM1.60), HSPLANT (TP: 2.30), TAANN (TP: RM3.70), UMCCA (TP: RM6.80), CBIP (TP: RM1.75), SAB (TP: 4.40) and UNDERPERFORM on IJMPLNT (TP: RM2.00).

Feb 2018 stocks declined less than expected, at -3% to 2.48m metric tons (MT) compared to consensus’ expected 2.37m MT (-7% Month-on-Month (MoM)) and our 2.39m MT (-6% MoM). Although production decline at 1.34m MT (-15%) was even lower than consensus and our 1.40m MT (-12%), exports declined commensurately (-13% to 1.31m MT), near to consensus’ 1.33m MT (-12%) and our estimated 1.32m MT (-13%). Imports, notably, surged 93% to 67k MT, possibly due to tighter local supply. Domestic consumption was weak at 170k MT (-41%), in line with demand trends during festival periods. On the export side, a surge in Indian demand (+56% to 314k MT) failed to offset weak Pakistan (-33% to 68k MT) and China demand (-33% to 105k MT), as markets were closed during the festive season.

Production to hit new highs (Mar 2018 +17% to 1.57m MT). Feb 2018 production, despite declining 15%, hit a new high for the month at 1.34m MT, with only Sarawak production seeing a Year-on-Year (YoY) decline (-15% to 234k MT), while Peninsular Malaysia and Sabah production rose 8% to 710k MT and 23% to 398k MT, respectively. With Sabah production roaring back after several weak years, we expect double-digit growth in the region to persist over the first half, while Peninsular Malaysia and Sarawak should see positive growth in March with higher harvesting days. As such, we expect Mar 2018 palm oil production to rise 17% to 1.57m MT, paving the way for a production uptrend, likely until May-Jul 2018.

Exports to edge up 3% to 1.35m MT. Feb 2018 exports declined 13% to 1.31m MT, coming in close to consensus’ 1.33m MT and our 1.32m MT expectation. A 56% surge in Indian demand failed to offset drops in China (-33%), Pakistan (-33%) and the rest of the world (- 34%). Looking ahead, we expect the surprise hike in Indian palm oil import duties earlier this month to have a similar dampening effect on Indian demand, as seen in the previous tariff hike in mid-Nov 2017. Exports to India plunged 40% to 100k MT for that month. We expect a similar quantum of decline to be seen in Mar 2018 given recent reports of Indian buyers cancelling shipments. Nevertheless, with abundant supplies coming on-stream, we think shipments to other regions should remain supportive. Thus, we expect Mar 2018 exports to improve 3% to 1.35m MT.

Mar 2018 stocks to rise slightly, at +1% to 2.50m MT. As imports and local usage normalises, we estimate supply at 1.61m MT to be marginally higher than demand at 1.59m MT, resulting in a slight increase in Mar 2018 stocks of +1% to 2.50m MT. Production should surge with higher harvesting days, by +17% to 1.57m MT. Meanwhile, exports should edge up 3% to 1.35m MT as demand recovery is dragged by higher Indian import tariffs. Overall, we expect stocks to rise 1% to 2.50m MT. From a price perspective, with stock levels likely to rise on the back of a production uptrend, we expect CPO prices to see headwinds ahead, more so with stock levels disappointing on the high side in Feb 2018.

Reiterate NEUTRAL on plantations; bearish on CPO prices. With futures prices adjusting downward yesterday on disappointing stocks, we continue to expect a downtrend in CPO prices in 2Q-3Q18. Our FY18 price forecast of RM2,400/MT remains intact, while we tweak our short-term CPO price range slightly lower to RM2,200-2,500/MT (from RM2,200-2,550/MT) on an unchanged soybean oil (SBO) discount of USD60/MT and crude oil premium of USD100/MT. Despite the bearish price prospect, we think plantation companies should see reasonable margins as our forecasted CPO price remains well above the per-ton production cost of an efficient planter (c.RM1,400/MT) – particularly in a rising production environment. Nevertheless, with the market tendency to underweight plantation stocks in a declining CPO price environment, we maintain our overall neutral outlook on the sector. Our preferred pick remains PPB (OP; TP: RM19.85) as we expect its associate Wilmar to see lesser earnings volatility on its new Sugar marketing strategy, while the Tropical Oils segment could see a recovery given expectations of stronger Indonesian biodiesel volume.

Source: Kenanga Research - 13 Mar 2018