December 2018 stocks rose for the seventh consecutive month to 3.22m MT (+6.9% MoM), exceeding both our forecast and consensus estimate of 3.14m MT (+4.3% MoM), mainly due to higher-than-expected production of 1.81m MT (-2.0% MoM) vs. our forecast of 1.73m MT (-6.4% MoM) and consensus estimate of 1.78m MT (- 3.6% MoM). Exports of 1.38m MT (+0.6% MoM) were largely in line with our expectation of 1.36m MT (-1.4% MoM), but above consensus’ 1.14m MT (-17.1% MoM). The slight pick-up in exports was largely supported by surprisingly strong demand from China (+55.6% MoM to 269k MT). For January 2019, we believe production will decline 14.1% MoM to 1.55m MT due to seasonality, while exports should rise 6.8% MoM to 1.48m MT ahead of Chinese New Year and as India lowered import tax on CPO from 44% to 40%. All-in, we anticipate supply of 1.64m MT to trail demand of 1.80m MT in January, leading to lower ending stocks of 3.06m MT (-4.9% MoM), ending a seven-month streak of increasing stockpiles. We expect CPO prices to improve to RM2,300-2,400/MT by the end of 1QCY19 on near-term positives such as India reducing import tax in January and China resuming purchases of US soybean, 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% Maintain NEUTRAL despite expected improvements in CPO prices, as a potentially frail February results season could pressure planters’ share prices. For investors who would like to gain exposure to the plantation sector, we recommend selective positions in: (i) HSPLANT (OP; TP: RM1.95) as its share price appears overly punished at -3.5SD below PBV mean; and (ii) GENP (OP; TP: RM10.50) for its above-average FFB outlook and stable earnings contribution from JPO and GPO, while trading at an undemanding FY19E PER of 19.3x (-2.0 SD). We have downgraded CBIP from OP to MP with unchanged TP of RM1.10.

December 2018 stocks rose for the seventh straight month to a record-high of 3.22m MT (+6.9% MoM), exceeding both our forecast and consensus estimate of 3.14m MT (+4.3% MoM). This was mainly due to higher-than-expected production of 1.81m MT (-2.0% MoM) vs. our forecast of 1.73m MT (-6.4% MoM) and consensus estimate of 1.78m MT (-3.6% MoM). Exports of 1.38m MT (+0.6% MoM) were largely in line with our expectation of 1.36m MT (-1.4% MoM), but above consensus’ 1.14m MT (-17.1% MoM). The slight pick-up in exports was largely supported by surprisingly strong demand from China (+55.6% MoM to 269k MT); the highest since August 2016, flashing signs that the country is fulfilling its earlier pledge to increase purchases of Malaysian crude palm oil (CPO). Demand from India and the US were also notably higher at 284k MT (+17.3% MoM) and 58k MT (+63.7% MoM), respectively. For full-year 2018, production dipped by 2.0% YoY to 19.5m MT while imports increased 51% YoY 841k MT (+51% YoY). On the demand front, exports were flattish at 16.5m MT while domestic consumption was 15% higher YoY at 3.28m MT. Overall, supply outstripped demand by 483k MT in 2018, resulting in a 17.7% YoY increase in stockpiles.

January 2019 production to fall by 14.1% MoM to 1.55m MT. Production had peaked in October 2018 and started slowing down for two consecutive months. We believe this trend will continue for the next two months, reaching as low as 1.25-1.30m MT before picking up in March 2019. January is historically a low production season with an average MoM decline of 14.1% in the past 5 years. We expect January 2019 to be no exception, and forecast production to drop 14.2% to 1.55m MT.

Exports to rise 6.8% MoM to 1.48m MT in January 2019. We believe exports to China will remain strong in January ahead of Chinese New Year in February 2019, while exports to the Europe region should recover after 3 months of below-average purchases. Similarly, India is likely to purchase more CPO in January after the country lowered import tax on CPO from 44% to 40%. Overall, we forecast January exports volume to increase 6.8% MoM to 1.48m MT.

January 2018 stocks to ease by 4.9% MoM to 3.06m MT. We anticipate supply of 1.64m MT to trail demand of 1.80m MT in January, leading to lower ending stocks of 3.06m MT (-4.9% MoM), ending a seven-month streak of increasing stockpiles. As such, we expect CPO to improve to RM2,300-2,400/MT by the end of 1QCY19 on near-term positives such as India reducing import tax in January and China resuming purchases of US soybean, 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%

Maintain NEUTRAL. Despite expected improvements in CPO prices, we maintain our neutral outlook on the sector as a potentially frail February results season could pressure planters’ share prices. For investors who like to gain exposure to the plantation sector, we recommend selective positions in: (i) HSPLANT (OP; TP: RM1.95) as its share price appears overly punished at -2.5SD below PBV mean; and (ii) GENP (OP; TP: RM10.50) for its above-average FFB outlook and stable earnings contribution from JPO and GPO, while trading at an undemanding FY19E PER of 19.9x (-1.5 SD).

Source: Kenanga Research - 11 Jan 2019