November 2018 stocks rose for the sixth consecutive month to 3.01m MT (+10.5% MoM), within consensus estimate of 3.02m MT (+10.8% MoM) and our forecast of 2.99m MT (+9.9% MoM). While it was comforting that production of 1.85m MT (-6.1% MoM) was lower than consensus’ and our expectations, it was negated by weaker-than-expected exports (-12.9% MoM to 1.38m MT). The exports shortfall came as exports to Others segment normalised from a high base of 940k MT to 691k MT (-26.5% MoM). Positively, we note that demand from India was significantly higher at 242k MT (+143.9% MoM), likely due to low CPO prices. We believe that production has likely reached its peak in October and started to slow down in November and expect this trend to continue for the month of December as we enter the height of the monsoon season in the East Coast and Sarawak, followed by a sharp seasonal drop in January. As such, we forecast December output to fall by 6.4% MoM to 1.73m MT, representing the median of 2015-2017’s December decline. Meanwhile, we believe December exports volume would inch down by 1.4% MoM to 1.36m MT on seasonality. All-in, we anticipate supply of 1.79m MT to exceed demand of 1.66m MT in December, leading to higher ending stocks of 3.14m MT (+4.3% MoM), marking the seventh consecutive monthly increase. We expect CPO prices to recover to RM2,200-2,250/MT level in January on seasonal production slowdown and higher festive demand. Reiterate NEUTRAL as uncertainties vis-à-vis trade war prevail. For investors who would like to gain exposure to the sector, we recommend bashed-down names such as CBIP (OP; TP: RM1.10), HSPLANT (OP; TP: RM1.95) and TAANN (OP; TP: RM2.35); planters with good execution track records and robust production outlook such as GENP (OP; TP: RM10.50); and/or companies with well diversified earnings base like PPB (OP; TP: RM18.35).

November 2018 stocks rose for the sixth straight month to a record-high of 3.01m MT (+10.5% MoM), in line with consensus estimate of 3.02m MT (+10.8% MoM) and our forecast of 2.99m MT (+9.9% MoM). While it was comforting that production of 1.85m MT (-6.1% MoM) was lower than consensus’ (-2.1% MoM to 1.92m MT) and our (+2.6% MoM to 2.02m MT) expectations, it was negated by weaker-than-expected exports (-12.9% MoM to 1.38m MT). We had expected exports to only inch down 2.8% MoM to 1.53m MT while the street projected a 11.0% MoM drop to 1.41m MT. The exports shortfall came as exports to Others segment normalised from a high base of 940k MT to 691k MT (-26.5% MoM). On a positive note, we note that demand from India was significantly higher at 242k MT (+143.9% MoM) likely due to low CPO prices.

December 2018 production to fall by 6.4% MoM to 1.73m MT. We believe that production has likely reached its peak in October and started to slow down in November. We expect this trend to continue for the month of December as we enter the height of the monsoon season in the East Coast and Sarawak, followed by a sharp seasonal drop in January. As such, we forecast December output to fall by 6.4% MoM to 1.73m MT, representing the median of 2015-2017’s December decline.

Exports to dip 1.4% MoM to 1.36m MT in December 2018. We expect exports to retreat slightly in December on seasonality factors. Traditionally, exports to China tended to decline in the month of December as it entered the winter season as CPO is prone to solidification in cold temperatures. Nevertheless, this should be cushioned by higher seasonal demand from the EU and US. Overall, we forecast December exports volume to inch down by 1.4% MoM to 1.36m MT.

December 2018 stocks to rise 4.3% MoM to 3.14m MT. We anticipate supply of 1.79m MT to exceed demand of 1.66m MT in December, leading to higher ending stocks of 3.14m MT (+4.3% MoM), marking the seventh consecutive monthly increase. In spite of that, we believe this will not weigh down CPO prices further given production has already begun to slow down and is anticipated to come off sharply in January. In addition, demand is likely to pick up in 1QCY19 on festivities such as Chinese New Year. As such, we expect CPO prices to recover to RM2,200-2,250/MT level in January.

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 bashed-down names like (i) CBIP (OP; TP: RM1.10) given sizable orderbook replenishment expected in 1Q19 and its attractive FY19E PER of 7.7x (-2.5 SD); (ii) HSPLANT (OP; TP: RM1.95) as its share price appears highly oversold at -3.5SD below PBV mean; and (iii) TAANN (OP; TP: RM2.35) as the peak crop season towards year-end should coincide with better plantation and timber performances. We also favour GENP (OP; TP: RM10.50) for its above-average FFB outlook and stable earnings contribution from JPO and GPO, while the stock trades at an undemanding FY19E PER of 19.3x (-2.0 SD) and PPB (OP; TP: RM18.35) as its own businesses continue to record growth while the potential listing of Wilmar’s China arm provides a re-rating catalyst.

Source: Kenanga Research - 11 Dec 2018