Apr 2018 stocks saw a fourth consecutive decline of 6% to 2.17m MT, lower than consensus’ expected 2.23m MT and our 2.38m MT forecast. Exports declined slightly by 2% to 1.54m MT, less than consensus’ expected 1.48m MT and our 1.46m MT. Production was unexpectedly flat at 1.56m MT, near consensus’ 1.57m MT but below our expected 1.68m MT. Going forward, we think production should continue its normalizing track, particularly in Pen. Malaysia and Sabah, for +9% growth to 1.69m in May. Meanwhile, exports are likely to remain flat at +1% to 1.56m MT as we expect good China and EU demand to be offset by slowing India and Pakistan demand. As such, stocks should be flat at 2.17m MT for May, as supply and demand are matched at 1.75m MT. We maintain our FY18E CPO price estimate at RM2,400/MT and continue to expect weaker prices in 2H18 as production outstrips demand growth. We remove our trading floor price of RM2,250/MT (previously based on crude oil premium of USD100/MT) as gasoil prices have now exceeded CPO prices, providing a very strong baseline to CPO prices. Our CPO price cap is unchanged at RM2,500/MT. With the favorable stock movement, possibility for RM weakness and strong support from crude oil, we are cautiously optimistic on the sector’s short-term share price prospects. Investors may view the sector as a potential safe haven while other sectors see higher volatility. Our Top Pick remains the defensive PPB (OP; TP: RM22.60) given its strong Consumer exposure and undemanding PBV against its associate Wilmar. Other large-cap integrated planters such as SIMEPLT (TP:RM5.90), KLK (TP:RM 25.75), and IOICORP (TP:RM5.15) may also see good share price stability going into the mid-term as their integrated manufacturing operations should benefit from lower CPO prices. Other calls are unchanged, namely: OUTPERFORM CBIP (TP: RM1.80), FGV (TP: RM2.00), TAANN (TP: RM3.70) and SAB (TP: RM4.40) on MARKET PERFORM on GENP (TP: 10.75), HSPLANT (TP: RM2.30), TSH (TP: RM1.60) and UMCCA (TP: RM6.20) and UNDERPERFORM on IJMPLNT (TP: RM2.00).

Apr 2018 stocks declined 6% Month-on-Month (MoM) to 2.17m metric tons (MT), coming in 2% below consensus’ expected 2.23m MT and 9% below our 2.38m MT estimate. This was largely due to better-than-expected exports, which was largely flat (-2%) at 1.54m MT compared to consensus and our forecasted decline to 1.48m MT (-5%) and 1.46m MT (-7%), respectively. Exports were strongly supported by EU purchases, which rose 44% to 191k, likely as higher crude oil prices triggered higher purchases for biodiesel use. Production was flat (- 1%) at 1.56m MT, close to consensus’ 1.57m MT but below our expected increase of 1.68m MT (+7%).

Production to grow after a breather (+9% to 1.69m MT). April production declined slightly (- 1%) to 1.56m MT as production in Peninsular Malaysia and Sabah took a breather after solid production numbers in the last six months. Going forward, with production close to normalised levels, we expect to see production rise MoM in line with historical trends up to SepOct 2018, albeit with less dramatic year-on-year (YoY) growth compared to 2H17, which had already seen production recovery against previous years. As such, we anticipate production to increase by 9% to 1.69m MT in May with improvements across all key production regions.

Flat exports ahead (+1% to 1.56m MT). April exports were flat (1.54m MT) compared to an expected decline by consensus (1.48m MT or -5%) and our forecast (1.46m MT or -7%) as EU purchases surged 44% to 191k MT, more than making up for weaker Indian demand (-24% to 300k MT). Chinese purchases were also supported at +9% to 146k MT. Despite Ramadan coming up, we believe the bulk of pre-festival demand has been sated especially from India and Pakistan in light of the above-average demand in the last 2 months. Therefore, we expect China and the EU to continue driving demand in the next two months, dependent on US-China soybean policy and favourability of the palm oil-gasoil (POGO) spread, respectively. Thus, we anticipate flat overall demand in May at 1.56m MT.

Flat stocks for May at 2.17m MT. We anticipate higher supply of 1.75m MT to be offset by demand of 1.75m MT, leading May supply to remain flat at 2.17m MT. Production should continue rising, by 9% to 1.70m MT on normalised production, while exports should be largely flat (+1%) to 1.56m MT as better China and EU demand offsets softer India and Pakistan purchases. Price-wise, we expect the news of stock decline to be favourable to palm oil prices in the near term. We observe that YTD export demand has been very supportive at +20%, comparing favourably to YTD production growth of +9%. However, moving forward we expect production growth to outstrip export demand, especially in 2H18, as historically production growth tends to rise higher than export growth towards later months of the year (please refer to chart on page 3), leading to higher supply, stocks build-up, and a weaker price outlook in 2H18.

Maintain NEUTRAL, with potential for short-term lift given the favourable stock movement, very supportive crude oil prices, and possibility RM weakness in view of the recent election. We are cautiously optimistic on plantation stocks’ performance in the near term as a potential safe haven while other sectors may see higher volatility. Our FY18E CPO price forecast is unchanged at RM2,400/MT and

we remove our trading floor price of RM2,250/MT (previously based on crude oil premium of USD100/MT) as gasoil prices have now exceeded CPO prices, providing a very strong baseline to CPO prices. Our CPO price cap is unchanged at RM2,500/MT based on soybean oil (SBO) discount of USD60/MT. Our Top Pick remains the defensive PPB (OP; TP: RM22.60) with its strong exposure to the Consumer sector, as well as undemanding PBV valuation of 1.0x against Wilmar’s 1.3x PBV. Large-cap planters such as SIMEPLT (TP: RM5.90), KLK (TP: RM25.75), and IOICORP (TP: RM5.15), may also see good share price stability going into the medium-term as their integrated manufacturing operations should benefit from lower CPO prices.

Source: Kenanga Research - 14 May 2018