October 2018 stocks rose for the fifth consecutive month to 2.72m MT (+7.6% MoM), within our forecast of 2.79m MT (+10.5% MoM), but 6.1% below consensus estimate of 2.90m MT (+14.6%) mainly because of stronger-than-expected exports of 1.57m MT (-3.0% MoM). The positive surprise likely stemmed from an astounding increase in exports to China (+94.2% MoM). CPO production rose 6.0% MoM to 1.96m MT on seasonal pickup, largely in line with our forecast of 1.91m MT (+3.0% MoM) and consensus estimate was spoton. Based on our surveys with a few large-cap planters, we believe FFB production would reach its peak in November. Therefore, we expect November output to grow 2.6% to 2.02m MT. Meanwhile, we believe exports would retreat 2.4% MoM to 1.53m MT in November on seasonality. All-in, we expect November stocks to rise 9.9% MoM to reach a record high of 2.99m MT on higher supply of 2.10m MT, exceeding demand of 1.83m MT. Reiterate NEUTRAL and maintain FY18E CPO price of RM2,300/MT as we expect improvements in CPO prices in December when production tapers off. We continue to favour GENP (OP: TP: RM10.80) due to a likely robust FFB production pick-up in Indonesia for 2HCY18 and PPB (OP; TP: RM18.35) as the group continues to expand across its key segments and the upcoming listing of Wilmar’s China business (targeted for FY19-20) could provide re-rating catalyst

October 2018 stocks rose for the fifth consecutive month to 2.72m MT (+7.6% MoM), within our forecast of 2.79m MT (+10.5% MoM), but 6.1% below consensus estimate of 2.90m MT (+14.6%) mainly because of stronger-than-expected exports of 1.57m MT (- 3.0% MoM). The street had expected exports to decline by 13.0% MoM to 14.1m MT. The positive surprise likely stemmed from an astounding increase in exports to China (+94.2% MoM), which is a possible sign of the country fulfilling its pledge to increase CPO imports from Malaysia. While we observed lower exports to India (-56.5% MoM) and the EU (- 27.2% MoM), it is noteworthy that cumulative purchases (10M18) from the countries were still up 9% and 2% YoY, respectively. Meanwhile, CPO production rose 6.0% MoM to 1.96m MT on seasonal pickup, largely in line with our forecast of 1.91m MT (+3.0% MoM) and consensus estimate was spot-on.

November 2018 production to grow 2.6% to 2.02m MT. Based on our surveys with a few large-cap planters, we believe FFB production would reach its peak in November. Therefore, we forecast November ouput to increase to 2.02m MT (+2.6% MoM), representing the median of 2014-2017’s peak production. Note that we are projecting weaker growth momentum as October has marked the fourth consecutive month of increase.

Exports to dip 2.4% MoM to 1.53m MT in November 2018. We believe exports would retreat slightly in November on seasonality. Traditionally, exports tended to decline in the months of November and December as the Nothern Hemisphere entered the winter season. CPO is prone to solidification in cold temperatures. Overall, we forecast November exports volume to decline by 2.4% MoM to 1.53m MT.

November 2018 stocks to rise 9.9% to 2.99m MT. We anticipate supply of 2.10m MT to exceed demand of 1.83m MT in November, leading to higher ending stocks of 2.99m MT, marking the sixth consecutive monthly increase. We believe this would suppress CPO price in November. Having said that, we do not expect CPO price to trend down much further from the current level of RM1,900/MT (as of 9 Nov 2018), which is already below smallholders’ cost of production of about RM2,000/MT. CPO’s discount to gasoil of c.USD180/MT vs. 1-year average of c.USD49 should also provide some support to CPO prices, as it encourages discretionary biodiesel blending. We expect CPO prices to recover to RM2,200-2,250/MT level in December on a likely seasonal production slowdown and other recent supportive events including Indonesia’s extension of B20 mandate and China’s pledge to increase CPO imports from Malaysia. Our 2018E CPO price forecast remains unchanged at RM2,300/MT (vs. YTD average of c.RM2,303/MT).

Maintain NEUTRAL. Despite strong production and a potential CPO price recovery in the coming months, we maintain our neutral stance on the sector as uncertainties vis-à-vis trade war prevail, which continue to hurt the industry’s sentiment and cap further upsides to CPO prices beyond our assumptions. Hence, we are not particularly excited about the plantation sector over the near-term and recommend investors to be selective in seeking exposure into the sector. Within our coverage, we prefer GENP (OP: TP: RM10.80) due to a likely robust FFB production pick-up in Indonesia for 2HCY18 and PPB (OP; TP: RM18.35) as the group continues to expand across its key segments and the upcoming listing of Wilmar’s China business (targeted for FY19-20) could provide re-rating catalyst. Our TP for PPB is based on joint Sum-of-Parts between PPB and Wilmar, valuing Grains & Consumer Products segment at 22.5x FY19E PER and Plantation segment at 23.2x FY19E PER. For GENP, our TP is based on Sum-of-Parts as well, valuing Plantation segment at 21.9x FY19E PER. PPB is currently trading at +1.0SD above its mean Fwd. PER, which we believe is still undervalued compared to QL’s Fwd. PER of >50x; while GENP appears attractive with its Fwd. PER, currently at -2.0SD below mean.

Source: Kenanga Research - 13 Nov 2018