January 2019 inventory eased 6.7% MoM to 3.00m MT from a record-high of 3.22m MT seen last month, a slight positive surprise for the sector compared with the consensus estimate of 3.07m MT (-4.7% MoM) and our forecast of 3.06m MT (-4.9%). This was mainly due to a 29-month high exports volume (+21% MoM to 1.68m MT), which well exceeded consensus’ +12% and our +7% expectations. On the other hand, MoM production decline of 3.9% (to 1.74m MT) was slower than consensus' 11% and our 14% expectations. For February 2019, we believe production will decline further by 12.8% MoM to 1.52m MT on seasonality, while exports are likely to retrace by 13.5% MoM to 1.45m MT from a high base. All-in, we anticipate supply of 1.59m MT to fall short of demand of 1.73m MT, leading to lower ending stocks of 2.85m MT (-4.9% MoM) in February 2019. We expect CPO prices to improve to RM2,300-2,400/MT by the end of 1QCY19 on near-term positives such as China resuming purchases of US soybean and biodiesel initiatives panning out as anticipated, 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%. For investors who like to gain exposure to the plantation sector, we recommend selective positions in: (i) TSH (OP; TP: RM1.30) given its higher earnings sensitivity to CPO price recovery and status as the only pure upstream planter under our coverage that is still profitable at the pretax profit level, 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 21.0x (-1.5 SD).

January 2019 inventory eased 6.7% MoM to 3.00m MT from a record-high of 3.22m MT seen last month, ending a seven-month streak of increasing stockpiles. The figure was a slight positive surprise for the sector compared with the consensus estimate of 3.07m MT (-4.7% MoM) and our forecast of 3.06m MT (-4.9%), thanks to a 29-month high exports volume (+21% MoM to 1.68m MT), which well exceeded consensus’ +12% and our +7% expectations. Except Pakistan, exports grew MoM across all other major destinations with +170% for the Europe region (EU), +18% for China and +12% for India. The strong exports growth for China likely coincided with pent-up demand during Chinese New Year, while India’s pick-up could be attributed to the reduction of CPO import tax from 44% to 40% last month. For EU, the significant exports growth was likely due to a recovery after 3 months of below-average purchases. On the other hand, MoM production decline of 3.9% (to 1.74m MT) was slower than consensus' 11% and our 14% expectations.

February 2019 production to fall further by 12.8% MoM to 1.52m MT. Production had peaked in October 2018 and started slowing down for three consecutive months. We believe this trend will continue for another two months, reaching as low as 1.25- 1.30m MT in March 2019 before picking up in April 2019. February is historically a low production season with an average MoM decline of 8.7% in the past 5 years. We expect February 2019 to register a larger-than-usual MoM decline of 12.8%, falling to 1.52m MT, as last month’s production remained exceptionally high at 1.74m MT vs. 5-year’s January average of 1.33m MT.

Exports to retrace by 13.5% MoM to 1.45m MT in February 2019. We believe exports volume in February 2019 will retrace from a high base across all major destinations, especially for China given the absence of festive demand boost, and Indian demand boost as buying frenzy arising from lower import tax fizzles out. Overall, we forecast February 2019 exports volume to decline 13.5% MoM to 1.45m MT.

February 2019 stocks to ease by 4.9% MoM to 2.85m MT. Despite lower exports, we anticipate supply of 1.59m MT to fall short of demand of 1.73m MT in February 2019, leading to lower ending stocks of 2.85m MT (-4.9% MoM). As such, we expect CPO to improve to RM2,300-2,400/MT by the end of 1QCY19 on near-term positives such as China resuming purchases of US soybean and biodiesel initiatives panning out as anticipated, 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) TSH (OP; TP: RM1.30) given its higher earnings sensitivity to CPO price recovery and status as the only pure upstream planter under our coverage that is still profitable at a pre-tax profit level, 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 21.0x (-1.5 SD).

Source: Kenanga Research - 12 Feb 2019