Mar 2018 stocks declined for the fourth month, at -6% to 2.32m MT. This was less than market’s anticipated -9% to 2.27m MT but above our 2.50m MT forecast as Indian demand surged 26% to 395k MT in anticipation of tax regime changes. Production improved 17% to 1.57m MT, in line with our estimate (1.57m MT) and higher than consensus’ 1.49m MT. Exports as a whole also rose 19% to 1.57m MT, meeting consensus (1.57m MT) and exceeding our expected 1.35m MT due to strong Indian demand as noted. Looking ahead, we expect continued production uptrend at +7% to 1.68m MT on continued recovery in Peninsular Malaysia and Sabah. Meanwhile, exports should slow 7% to 1.45m MT as we believe restocking activity had largely taken place, while Indian demand should normalize going forward. Overall, Apr 2018 stocks should increase 2% to 2.38m MT as supply at 1.73m MT exceeds demand of 1.68m MT. Accordingly, we anticipate minor price weakness on the cards due to lower upside risk as we narrow our short-term CPO trading range to RM2,250-2,500/MT (from RM2,200-2,500/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, anticipating potential demand and price volatility from protectionist actions, leading us to prefer defensive options such as our Top Pick PPB (OP; TP: RM22.60) with its strong exposure to the consumer sector and undemanding PBV valuation of 1.0x, against Wilmar’s 1.3x PBV. Other calls are unchanged, namely: OUTPERFORM on CBIP (TP: RM1.80), FGV (TP: RM2.00), TAANN (TP: RM3.70) and SAB (TP: RM4.40) and UNDERPERFORM on IJMPLNT (TP: RM2.00). At the same time, we have MARKET PERFORM calls on SIMEPLT (TP: RM5.90), IOICORP (TP: RM5.15), KLK (TP: RM25.75), GENP (TP: 10.75), HSPLANT (TP: RM2.30), TSH (TP: RM1.60) and UMCCA (TP: RM6.20).

Mar 2018 stocks slightly above consensus, declining 6% to 2.32m metric tons (MT). This is higher than consensus’ expected 9% month-on-month (MoM) decline to 2.27m MT but lower than our flat forecast of 2.50m MT. Production at 1.57m MT rose 17% MoM, higher than consensus’ +11% to 1.49m MT but on par with our forecast of 1.57m MT. Exports surged 19% to 1.57m MT, in line with consensus (1.57m MT) and well above our anticipated 1.35m MT due to a surge in Indian demand (+26% to 395k MT) as India announced an increase in import tax, combined with the previous expectation of Malaysian export tax returning in April.

Production uptrend to continue (+7% to 1.68m MT). Mar 2018 production at 1.57m MT represented a 17% increase MoM, hitting yet another record for March with growth seen in all key producing regions. Sarawak saw the strongest growth at +22% MoM, although we note that year-to-date (YTD) production actually softened 5% as production pulled back slightly from a record year in 2017 (4.13m MT). YTD, both Peninsular Malaysia and Sabah continued to show production recovery of +16% and +21%, respectively. Looking ahead, we expect sequential production growth to continue in April, at +7% to 1.68m MT (close to the previous April production record of 1.69m MT).

Expect exports to soften 7% to 1.45m MT. Mar 2018 exports surged 19% to 1.56m MT, similarly representing a new high for the month on the back of continued higher demand from India at 395k MT (+26%). China and Pakistan also saw solid demand improvement at +28% to 134k MT and +71% to 116k MT, respectively. However, EU demand weakened 46% to 133k MT, though this is close to the long-term average monthly demand of 135k MT. We do not expect strong Indian purchasing to continue, as increased Indian import tariffs (from 30% to 44%) come full effect for the month. We believe that restocking activity ahead of the previously expected restoration of Malaysian export tax on 7-Apr has already taken place (explaining the strong demand seen in the first 10 days of April at +26% to 450k MT), and the extension of export duty suspension up to month-end should only have limited impact on demand. As such, we anticipate April demand to moderate by 7% to 1.46m MT.

Apr 2018 stocks to edge up 2% to 2.38m MT. We estimate supply at 1.73m MT to exceed demand at 1.68m MT, for a gradual stock increase of 2% to 2.38m MT. Production should continue its uptrend, by +7% to 1.68m MT on the back of continued production recovery in Pen. Malaysia and Sabah. Meanwhile, exports should weaken 7% to 1.46m MT as Indian demand normalises from the assorted tax adjustments seen in the last month. Overall, we anticipate stocks to increase by 2% to 2.38m MT. Price-wise, with slightly higher stocks and weaker demand on the horizon, we anticipate near-term price weakness, although this could be supported by theories of better palm oil demand should China engage in a trade war with the US. We are neutral on this possibility as we think the real winner would be Brazillian and Argentinan soy producers rather than palm oil, as a Chinese tariff on soy would result in weaker soybean oil prices (as the commodity is largely traded in the US), which limits the upside potential on palm oil prices even if the demand factor is supportive.

Maintain NEUTRAL, with limited short-term CPO upside. We maintain our FY18 price forecast of RM2,400/MT but narrow our shortterm CPO trading range to RM2,250-2,500/MT (from RM2,200-2,500/MT) with unchanged soybean oil (SBO) discount of USD60/MT and crude oil premium of USD100/MT. Despite the uptick in crude oil prices raising the price floor, we note that after the recent CPO price pickup to RM2,467/MT, our trading range now implies higher downside of 9% against upside of 1%. We continue to think that policy measures (especially protectionist actions) will be a big demand and price driver for the year, meaning that investors will need to stay nimble to avoid volatility, or select safer options with lower correlation to CPO prices. Therefore, our Top Pick remains PPB (OP; TP: RM22.60) with its strong exposure to the defensive consumer sector thanks to its Grains and Consumer Products segments in conjunction with Wilmar, as well as undemanding PBV valuation of 1.0x, against Wilmar’s 1.3x.

Source: Kenanga Research - 11 Apr 2018