September 2018 stocks inched up 1.4% MoM to 2.54m MT, below our 2.80m MT forecast due to stronger-thanexpected exports (+47.2% MoM to 1.10m MT), likely because of increased biodiesel blending in the EU amid a steep CPO-to-gasoil discount; and India’s move to raise import taxes on other competing vegetable oils, making CPO more competitive in the market. However, the stocks level was 2.8% above consensus estimate of 2.47m MT due to lower-than-expected local consumption. Production at 1.85m MT (+14.4% MoM) was in line with consensus (1.86m MT) but above our forecast (1.77m MT), as Sabah’s production recovered from weather hiccups quicker than expected. For October, we expect output to increase 3.0% MoM to 1.91m MT given the largely subsided effect of El Nino and La Nina whereas exports should decline 13.0% MoM to 1.41m MT as demand normalises. All-in, we expect October stocks to rise 10.4% MoM to 2.81m MT on higher supply of 1.97m MT, exceeding demand of 1.71m MT. Reiterate NEUTRAL and maintain FY18E CPO price of RM2,400/MT as we expect improvements in CPO prices in the near term, supported by rising demand for alternative vegetable oils from China, Indonesia’s extension of B20 mandate and increasing discretionary blending of biodiesel in the EU due to the current steep CPO-gasoil discount. 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 results with the commencement of sugar crushing season.

September 2018 stocks inched up 1.4% MoM to 2.54m metric tons (MT), 9.2% below our forecast of 2.80m MT, largely attributable to stronger-than-expected exports of 1.62m MT (+47.2% MoM) vs. our projected 1.22m MT. However, the stocks level was 2.8% above consensus estimate of 2.47m MT due to lower-than-expected domestic disappearance (local consumption) of 260k MT vs. 305k MT expected. We note that the strong exports growth stemmed from: (i) the EU (+185.2% MoM), likely because of increased biodiesel blending, and (ii) India (+64.0% MoM) after it raised import taxes on other competing vegetable oils, making CPO more competitive in the market. Meanwhile, CPO production rose 14.4% MoM to 1.85m MT, in line with consensus’ 1.86m MT but above our forecast of 1.77m MT as Sabah’s production recovered from El Nina and La Nina effect quicker than expected.

October 2018 production to grow 3.0% MoM to 1.91m MT. From our channel checks with planters, we gather that the adverse effect of El Nino and La Nina has largely subsided. Therefore, production is likely to continue picking up in the coming months through November. As such, we forecast October output to increase 3.0% MoM to 1.91m MT, and subsequently peak at about 2.00m MT in November. Note that we are projecting weaker growth momentum as September has marked the third consecutive month of increase.

Exports to decline by 13.0% MoM to 1.41m MT in October 2018. We believe exports would retreat in October after a huge spike (+47% MoM) to 1.62m MT last month, rising above its September’s 10-year average of 1.50m MT. Notably, exports to India could reverse last month’s increase as rupee continues to weaken against major currencies, pressuring the country to keep imports in check. Additionally, in spite of a steep CPO-to-gasoil discount, exports to the EU are likely to taper off in October as exports last month hit a 10-year high for the month of September. On the other hand, exports to China are expected to pick up as the country typically hoards inventory ahead of year-end holiday and winter seasons. Overall, we forecast October exports volume to decline by 13.0% MoM to 1.41m MT.

October 2018 stocks to rise 10.4% to 2.81m MT. We anticipate supply of 1.97m MT to exceed demand of 1.71m MT in October, leading to higher ending stocks of 2.81m MT. On CPO price, we expect to see meaningful improvements in the near term, fuelled by rising demand for alternative vegetable oils from China, Indonesia’s extension of B20 mandate and increasing discretionary blending of biodiesel in the EU amid a steep CPO-to-gasoil discount at c.USD218 (vs. 1-year average of c.USD22) currently. We opine that these factors would overshadow the prospective production pick-up in coming months in the determination of CPO price. To sum up, we believe the downside to CPO prices is limited at RM2,000/MT (based on smallholders’ cost of production) while upside is capped at RM2,550/MT (based on USD60/MT discount to competing SBO). Our 2018E CPO price forecast remains unchanged at RM2,400/MT (vs. YTD average of c.RM2,350/MT).

Maintain NEUTRAL. Despite potential CPO price and production improvements, we maintain our neutral stance on the sector as uncertainties vis-à-vis trade war prevail, which continue to hurt the industry’s sentiment. In addition, the improvements in CPO price and output are unlikely to supersede the earnings shortfall in 1H18, leaving 2018 an unexciting year for most planters. Within 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 results with the commencement of sugar crushing season. Our TP for PPB is based on joint Sum-of-Parts between PPB and Wilmar (base year: average of FY18-19E), valuing Grains & Consumer Products segment at 22.5x (10% discount to QL’s Fwd. PER of 25.0x); Plantation segment at 25.5x (in line with large-cap plantation average); Film segment at 22.0x (in line with Consumer Retail peers); Sugar at 18.0x (in line with MSM valuation), and other segments at BV. For GENP, our TP is based on based on Sumof-Parts (base year: average of FY18-19E) as well, valuing Plantations at Fwd. PER 23.5x (historical mean).

Source: Kenanga Research - 11 Oct 2018