June 2018 stocks rose 0.8% to 2.19m MT after a 5-month declining streak. This is in line with our 2.19m MT forecast but 2% above consensus’ 2.15m MT estimate on higher-than-expected imports (+166% to 86k MT). Exports at 1.13m MT were weaker than both consensus (1.19m MT) and our forecast (1.33m MT) due to weaker non-key market demand. Meanwhile, weaker production (-13% to 1.33m MT) came slightly below consensus’ 1.36m MT and well below our 1.54m MT forecast due to lower productivity during the festival season. Looking ahead, we anticipate a strong production rebound (+23% to 1.64m MT) as workers return; while exports should improve in tandem (+18% to 1.33m MT) with better demand from India, EU and non-key markets. All-in, we expect July 2018 stocks to rise 5% to 2.30m MT on higher supply (1.69m MT) exceeding demand improvement (1.58m MT). Reiterate NEUTRAL on the sector as production improvements and low CPO price downside should support planters’ margins. No change to our FY18E CPO price of RM2,400/MT although we continue to expect weaker 3Q18 prices (RM2,250/MT average) as upside risks outweigh opportunities. We narrow our 3Q18 trading range to RM2,200-2,400/MT (from RM2,150-2,450/MT) on unchanged USD40/MT discount to soybean oil prices and parity to crude oil prices for our cap and floor basis. We expect low and stable CPO prices to benefit downstream players such as IOICORP (OP; TP: RM5.00), PPB (OP; TP: RM22.30) and GENP (OP; TP: RM10.75). For small-caps, we like CBIP (OP; TP: RM1.50) on bargain valuations and low CPO price correlation. Our other calls are unchanged, namely: OUTPERFORM on FGV (TP: RM1.75) and TAANN (TP: RM2.85); MARKET PERFORM on HSPLANT (TP: RM2.15), KLK (TP: RM25.20) SIMEPLT (TP: RM5.60) SAB (TP: RM3.95) and UMCCA (TP: RM6.20); UNDERPERFORM on IJMPLNT (TP: RM2.00) and TSH (TP: RM1.10).

June 2018 stocks increased 0.8% to 2.19m metric tons (MT), marking a turnaround from 5 consecutive months of stock decline since Dec 2017. This is spot on with our forecast but 2% higher than consensus’ 2.15m MT, largely on higher-than-anticipated imports (+166% to 86k MT) vs. consensus and our expected 36k MT. Exports at 1.13m MT (- 13%) was weaker than both consensus (1.19m MT) and our forecast (1.33m MT) as better Indian demand (+112% to 160k MT) could not offset soft purchasing from non-key markets (-25% to 533k MT). Weaker production (-13% to 1.33m MT) was slightly below consensus’ 1.36m MT and well below our 1.54m MT forecast due to lower working days and fewer workers during the key festival season.

July 2018 production to rebound 23% to 1.64m MT. June 2018 production declined 13% to 1.33m MT, unexpectedly the lowest for the year – even below Feb 2018 production (1.34m MT) and the lowest production figure for June since 2006. This was mainly due to a 14% drop in Peninsular Malaysia production to 682k MT (compared to the 5-year average of 827k MT) which we suspect was due to worker shortages during the Eid festivities. Sarawak and Sabah productions were also down by 9% to 359k MT and 14% to 339k MT, respectively, due to similar reasons. With much catching up to do, we expect July production to rebound by double digits in all key producing areas. For July 2018, we forecast production to jump 23% to 1.64m MT. While the quantum appears high, we note that our forecast remains below the 5-year average of July production at 1.71m MT.

Exports to recover 18% to 1.33m MT in July 2018. June 2018 exports remained lackluster, weakening 13% to 1.13m MT on weaker demand from non-key markets (-25% to 533k MT). Among the top 15 purchasing countries, we note that demand from Middle Eastern countries (Turkey, Saudi Arabia, Iran) weakened 38% to 99k MT on weaker post-festival purchases. While demand has slowed in the last 2 months, we note that year-to-date (YTD) exports remained encouraging at +5% to 8.23m MT. Looking ahead, we expect better demand from India (equalising edible oil tariffs and upcoming festivals), EU (biodiesel demand) and other non-key markets to drive exports higher in July 2018 by 18% to 1.33m MT.

July 2018 stocks to rise 5% to 2.30m MT. We anticipate supply growth to 1.69m MT to exceed demand improvement to 1.58m MT for higher ending stocks of 2.30m MT in July 2018. Production should rebound from June lows, while exports should also improve albeit at a slower pace. We expect the trend reversal on palm oil stocks to contribute to softer CPO prices in 2H18. With risks (soft soybean price, higher palm production, higher Indonesian supply) outweighing opportunities (supportive crude oil price, better Indian and biodiesel demand), we continue to expect weaker 3Q18 CPO prices at RM2,250/MT.

Maintain NEUTRAL on plantations despite the lackluster immediate outlook as we think production improvements and limited downside risk could support planters’ margins in 2H. Our FY18E CPO price forecast is unchanged at RM2,400/MT and we further refine our short-term 3Q18 trading range to RM2,200-2,400/MT (from RM2,150-2,450/MT) based on an unchanged soybean oil (SBO) discount of USD40/MT as the price cap; and parity to crude oil prices as the price floor. Low but stable, CPO prices should benefit integrated planters due to lower input costs. Among these, we like IOICORP (OP; TP: RM5.00) and PPB (OP; TP: RM22.30). GENP (OP; TP: RM10.75) with its new refinery and above-average FFB growth could also benefit from rising production trends. Meanwhile, in the small-cap space, we like CBIP (OP; TP: RM1.50) given its bargain valuations and minimal correlation of its share price to CPO price trends.

Source: Kenanga Research - 11 Jul 2018