March 2019 CPO inventory of 2.92m MT (-4.6% MoM) was in line with consensus estimate of 2.85m MT (-6.8% MoM) but missed our forecast of 2.72m MT (-10.6% MoM), mainly attributable to higher-than-expected production of 1.67m MT (+8.2% MoM) vs. our estimate of 1.37m MT (-11.3% MoM). However, this was partially offset by stronger-than-expected exports volume of 1.62m MT (+22% MoM) vs. our 1.46m MT (+10.5% MoM) projection. The exports growth stemmed largely from China (+113% MoM to 172k MT) as volume bounced off a low base in the Chinese New Year (CNY) month. Unsurprisingly, exports to India saw a 24% MoM retracement to 342k MT as the buying frenzy arising from lower import tax dissipated. For April 2019, we believe production will inch up further by 4.0% MoM to 1.74m MT, while exports are also likely to improve 2.4% MoM to 1.66m MT backed by strong Chinese demand. All-in, we anticipate demand of 1.97m MT to outstrip supply of 1.83m MT in April 2019, leading to lower ending stocks of 2.78m MT (-4.8% MoM). In the near term, potential positive factors for the sector are: (i) further clarity on new biodiesel initiatives (B30 in Indonesia and B20 in Malaysia), (ii) higher exports to China given its pledge to buy 50% more palm oil from Malaysia, and (iii) slowing production in Indonesia as palms take a rest post-bumper harvest. Premised on these potential developments, we reiterate our 2019 average CPO price forecast of RM2,400/MT (vs. YTD average of RM2,005/MT), representing a 7% increase from RM2,235/MT in 2018. Notwithstanding, we maintain our neutral outlook on the sector as we believe the positive developments have been largely priced in. For investors who would like to gain exposure to the plantation sector, we recommend TSH (OP; TP: RM1.30), our only OP call, due to: (i) its above-average production outlook of +12% (vs. industry average of +5%), (ii) diversification benefits and stable income streams from its cocoa business (>30% of net profit), and (iii) it being the only pure upstream planter under our coverage that is still profitable.

March 2019 CPO inventory of 2.92m MT (-4.6% MoM) was in line with consensus estimate of 2.85m MT (-6.8% MoM) but missed our forecast of 2.72m MT (-10.6% MoM), mainly attributable to higher-than-expected production of 1.67m MT (+8.2% MoM) vs. our estimate of 1.37m MT (-11.3% MoM). However, this was partially offset by stronger-thanexpected exports volume of 1.62m MT (+22% MoM) vs. our 1.46m MT (+10.5% MoM) projection. The exports growth stemmed largely from China (+113% MoM to 172k MT) as volume bounced off a low base in the Chinese New Year (CNY) month. Unsurprisingly, exports to India saw a 24% MoM retracement to 342k MT as the buying frenzy arising from lower import tax dissipated.

April 2019 production to inch up 4.0% MoM to 1.74m MT. Production has likely reached a low in February and started inching up again in March. We believe production will continue to grow at a gradual pace through June, before a strong seasonal pickup typically in July-September. For April, we forecast CPO output to creep up 4% MoM to 1.74m MT, in line with the 3-year average pace of increase for the month of April.

Exports to improve further by 2.4% MoM to 1.66m MT in April 2019. We expect demand from China to continue picking up given its pledge to up its palm oil purchase from Malaysia by 50%, while demand from the EU region should also remain stable on the back of a recent recovery in crude oil prices that makes CPO more attractive for feedstock in biofuels. Overall, we forecast exports volume to improve 2.4% MoM to 1.66m MT in April 2019.

April 2019 stocks to ease by 4.8% MoM to 2.78m MT. All-in, we anticipate demand of 1.97m MT to outstrip supply of 1.83m MT in April 2019, leading to lower ending stocks of 2.78m MT (-4.8% MoM). In the near term, potential positives for the sector are: (i) further clarity on new biodiesel initiatives (B30 in Indonesia and B20 in Malaysia), (ii) higher exports to China given its pledge to buy 50% more palm oil from Malaysia, and (iii) slowing production in Indonesia as palms take a rest post-bumper harvest. Premised on these potential developments, we reiterate our 2019 CPO price forecast of RM2,400/MT (vs. YTD average of RM2,005/MT), representing a 7% increase from RM2,235/MT in 2018.

Maintain NEUTRAL. Despite expected improvements in CPO prices, we maintain our neutral outlook on the Plantation sector as we believe the positive developments have been largely priced in with the KLPLN index staging a handsome 12% recovery from the low in December 2018. For investors who would like to gain exposure to the plantation sector, we recommend TSH (OP; TP: RM1.30), our only OP call, due to: (i) its above-average production outlook of +12% (vs. industry average of +5%), (ii) diversification benefits and stable income streams from its cocoa business (>30% of net profit), and (iii) it being the only pure upstream planter under our coverage that is still profitable.

Source: Kenanga Research - 11 Apr 2019