2QCY18 was the weakest quarter since 2QCY14 as out of 13 companies under our coverage, 9 missed our forecasts while 10 missed consensus estimates; and none exceeded expectations. Given the broad earnings setback, we have trimmed FY18-19E earnings by an average of 13-8%, and accordingly downgrade TPs/calls for 9/5 companies. In POTS 2018 last week, forecasters were generally unexcited about CPO prices, with Mr Dorab Mistry stating that Malaysian CPO prices need to fall to RM2,100/MT to regain trade competitiveness and Dr James Fry forecasting that Malaysian CPO prices would trade around RM2,200/MT till December. Conversely, Mr Thomas Mielke believed that CPO price is bottoming out with a floor price of RM2,100/MT, supported by rising demand from the food and energy sector as well as production slowdown. We concur with Mr Mielke’s view as we expect slight improvements in CPO prices in the near term, underpinned by biodiesel demand and slower production this year. Maintain NEUTRAL with unchanged FY18E CPO price at RM2,400/MT. We continue to favour GENP (OP: TP: RM10.75) and PPB (OP; TP: RM18.60).

The weakest quarter since 2QCY14 as out of 13 companies under our coverage, 9 missed our forecasts while 10 missed consensus estimates; and none exceeded expectations. The companies that met our expectation were GENP, PPB, SIMEPLT and TSH. This is even weaker than 1QCY18 during which 7 companies missed our/consensus estimate. All planters under our coverage recorded lower YTD CPO prices received with an average decline of 13.3%, dwarfing the sector’s FFB growth of 13.0%. As a result, all the planters posted softer core earnings with the exception of PPB, which was lifted by other non-plantation segments and earnings. Given the broad earnings setback, we have trimmed FY18-19E earnings by an average of 13-8%, and accordingly reduce TPs for 9 companies (CBIP, FGV, HSPLANT, IJMPLNT, IOICORP, KLK, SAB, TAANN and UMCCA). Furthermore, we have downgraded 5 of our calls (for CBIP, FGV, IOICORP, SAB and TAANN). This is more severe compared with 1QCY18 during which we cut TPs for 8 companies and downgraded 4 of our calls. We remain positive and maintain our OP call for: (i) GENP on likely FFB production pick-up in Indonesia for 2HCY18, and (ii) PPB as its associate Wilmar is likely to post stronger 2HCY18 with the commencement of sugar crushing season.

MPOC’s POTS 2018. We attended the Palm Oil Trade Fair and Seminar (POTS) 2018 hosted by Malaysian Palm Oil Council (MPOC) at Shangri-La Hotel in Kuala Lumpur last week. The event was well attended, with c.400 participants from across the global oils and fats industry. We returned maintaining a neutral stance on the industry’s prospects with our mildly positive price outlook intact.

Forecasters were generally unexcited about CPO price. During the conference, in the bear camp were Mr Dorab Mistry (Director of Godrej International), who said Malaysian palm oil futures need to fall to RM2,100/MT to regain trade competitiveness (from current price of RM2,178/MT); and Dr James Fry (Chairman of LMC International), who forecast that Malaysian palm oil prices would trade around RM2,200/MT till December 2018. Mr Dorab Mistry also noted that it is unlikely that India would reduce import duties in the short term as the downside of rupee remains. On the other hand, Mr Thomas Mielke (Executive Director of Oil World) believed that CPO price is bottoming out with a floor price of RM2,100/MT, supported by rising demand from the food and energy sector as well as a slowdown in production this year. He added that CPO price is expected to recover moderately to RM2,500/MT over the next 6 months, with the reason being that imports of CPO are likely to pick up in coming months given the current low inventory levels in many importing countries. We concur with Mr Mielke’s view as we expect slight improvements in CPO prices in the near term underpinned by biodiesel demand and slower production this year.

Expect lower CPO production vs. last year. The trio of forecasters projected a dip in CPO production to 19.2-19.8m MT for the full year vs. 19.9m MT in 2017. We concur with the estimated range given that Malaysia’s CPO production to-date has mounted up to 10.4m MT while Jan-Jul CPO output constituted 53-54% of full-year production in the past 3 years. We are expecting a similar production trend this year (i.e. Jan-Jul constitutes c.53%), and therefore estimate 2018 CPO output at 19.5m MT. This is slightly below the Malaysian Palm Oil Board (MPOB)’s projection of 19.9m MT (20k MT decline from 2017 output).

Maintain NEUTRAL with unchanged FY18E CPO price at RM2,400/MT. We expect minor improvements in CPO prices in the near term, with downside limited at RM2,000/MT (based on smallholders’ cost of production) and upside capped at RM2,530/MT (based on USD60/MT discount to competing SBO). We believe CPO prices are supported by the current steep CPO-gasoil discount (>USD130), which renders biodiesel blending profitable and spurs discretionary demand for the alternative fuel. In addition, India’s recent move to raise import taxes on other vegetable oils (crude soyoil: from 30% to 35%, crude canola and sunflower oils: from 25% to 35%) improves the competitiveness of CPO, which is supportive of demand and prices. However, we do not see momentous price catalysts either given a likely seasonal production pick-up in 2H18, which limits CPO price improvements. All-in, we maintain our full-year CPO price forecast at RM2,400/MT (vs. YTD average of RM2,362/MT). Among the companies under our coverage, we continue to favour GENP (OP: TP: RM10.75) due to likely FFB production pick-up in Indonesia for 2HCY18 and PPB (OP; TP: RM18.60) as its associate, Wilmar, is likely to post stronger 2HCY18 with the commencement of sugar crushing season.

Source: Kenanga Research - 3 Sept 2018