We are turning more positive on the plantation sector for 1QCY19, as signs are pointing towards a sharp recovery in CPO prices. Locally and in Indonesia, stockpiles are expected to fall in coming months as production slows down seasonally. On demand front, we believe there will be a notable pickup in 1QCY19 coming from: 1) China, due to higher festive consumption during Chinese New Year; and 2) India, as import duty is set to be revised downwards from 44% to 40%, effective 1 January 2019. Recently, China has resumed purchases of US soybeans on a large scale, boding well for SBO prices and consequently CPO prices, given their high correlation. Riding on these factors, we expect CPO prices to improve to RM2,300-2,400/MT by the end of 1QCY19, and edge up further to RM2,500- 2,600/MT in 2QCY19 as stockpiles continue diminishing amid low production season, before retracing to RM2,200-2,300/MT in 2HCY19 when output picks up again. Overall, we forecast 2019 CPO price at an average of RM2,400/MT, representing a YoY increase of 7%. Nevertheless, we caution that February’s results season could be a hurdle, as lower CPO prices could likely overshadow production pick-ups in 4QCY18. As such, we believe a strategic time to accumulate shares in planters is early-March, with the focus on bashed-down upstream players like HSPLANT. All-in, we maintain NEUTRAL on the plantation sector with the possibility of upgrading to OVERWEIGHT if the following catalysts take form: (i) easing trade tensions between the US and China, (ii) higher exports of Indonesian CPO to the EU and, (iii) most importantly, falling stockpiles in both Malaysia and Indonesia. We recommend selective exposure, opting for bashed-down names like (i) CBIP (OP; TP: RM1.10) given sizable orderbook replenishment expected in 1Q19 and the stock trades at an attractive FY19E PER of 7.7x (-2.5 SD); and (ii) HSPLANT (OP; TP: RM1.95) as share price appears overly punished at -3.5SD below PBV mean. 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). We maintain MP but cut TP for (i) FGV, from RM0.965 to RM0.800, and (ii) IJMPLNT from RM1.85 to RM1.50, while downgrading TAANN from OP to MP with unchanged TP of RM2.35.

Seeing light at the end of the tunnel. We are turning more positive on the plantation sector for 1QCY19, as signs are pointing towards a sharp recovery in CPO prices. Over the next three months, key positive factors that we are monitoring closely are as follows: (i) easing trade tensions between the US and China, (ii) higher exports of Indonesian CPO to the EU and, (iii) most importantly, falling stockpiles in both Malaysia and Indonesia. Riding on these factors, we expect CPO prices to improve to RM2,300-2,400/MT by the end of 1QCY19, and edge up further to RM2,500-2,600/MT in 2QCY19 as stockpiles continue diminishing amid low production season, before retracing to RM2,200-2,300/MT in 2HCY19 when output picks up again. Overall, we forecast 2019 CPO price at an average of RM2,400/MT, representing a YoY increase of 7% (more details discussed later). Nevertheless, we are mindful that a potentially frail results season in February 2019 could dampen excitement in 1QCY19. We draw reference to a similar situation in January-March 2013 period, during which KLPLN index trended lower despite recovering CPO prices, as investors likely sold ahead of lacklustre results (see Exhibit 2). As such, we believe a strategic time to accumulate planters is early-March, with the focus on bashed-down upstream players like HSPLANT as well as planters with excellent execution capabilities and robust production outlook like GENP. Overall, we believe planters are seeing the light at the end of the tunnel after going through a rough ride in 4QCY18. We maintain our NEUTRAL stance for now with the possibility of upgrading to OVERWEIGHT if the above catalysts take form.

Easing stockpiles to support CPO prices. Locally, we believe that production of fresh fruit bunches (FFB) has likely reached its peak in October and has started slowing down in November. This trend is likely 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 production drop in January. Consequently, we believe stockpiles will edge down from current 3.0m MT to 2.5-2.6m MT by the end of 1QCY19, which is a fairly comfortable level in our opinion. Likewise, in Indonesia, consensus expectation from Bloomberg suggests that stockpiles likely declined c.10% to 3.9m MT in November from a 4.3m MT a month ago. On demand front, we believe there will be a notable pickup in 1QCY19 coming from: 1) China, due to higher festive consumption during Chinese New Year; and 2) India, as import duty is set to be revised downwards from 44% to 40%, effective 1 January 2019, as per the Malaysia-India Comprehensive Economic Cooperation Agreement. With diminishing supply and improving demand, stockpiles are likely to dwindle in 1QCY19, easing pressures on CPO prices.

Source: Kenanga Research - 3 Jan 2019