Output weakness in 2Q16 to sustain CPO price

MPOB’s Mar 2016 stockpile at 1.89m MT (-13% MoM, +1% YoY) was a fourth consecutive MoM decline, aided by weak output and relatively strong exports. The expected weak 2Q16 output will cushion CPO price downside in the short term while potential further drawdown in stockpile will push CPO price even higher. While 2Q16 still provides good trading opportunities in anticipation of even higher CPO price, upcoming generally weak 1Q16 results may lead to short-term profit taking. Our BUYs in the region are FR, AALI, LSIP, BAL, SOP and TAH.

Low output, high exports led to lower stockpile

The Malaysian Palm Oil Board’s (MPOB) Mar 2016 inventory continued its third consecutive MoM decline to 1.89m MT (-13% MoM, +1% YoY); its lowest in 12 months. March CPO production of 1.2m MT rebounded by 17% MoM largely due to two additional work days in March but was lower YoY (-18%) mainly due to the lagged effect of 2015’s drought. However, the higher output was more than offset by seasonally stronger exports at 1.33m MT (+23% MoM, +13% YoY) and stronger domestic consumption at 0.24m MT (+50% MoM, +5% YoY). But we suspect the stronger Mar 2016 exports were also partly due to traders/ exporters pushing more CPO exports before the end-Mar deadline, as Malaysia’s CPO exports will attract a 5% export tax from 1 April.

CPO price poised to go higher in 2Q16

The palm oil production in 2Q16 will be a crucial indicator as the market is anticipating a relatively weak output due to the lagged effect of the 2015-16 El Nino. If production turns out weak, we believe there is further upside to the current CPO price, possibly hitting our blue sky scenario of MYR2,900/t and closing the price gap between soyoil and CPO.

Otherwise, CPO price upside will be capped in the near term and in a worst case scenario, come under some pressure.

Still a trade in 2Q16

While maintaining our 12M NEUTRAL view on the sector, we continue to advocate a trading strategy in 2Q16 as El Nino offers a situational play and CPO price is poised to go higher in 2Q16. However, the upcoming generally weak 1Q16 results release may lead to some short-term profit taking. For Singapore planters, 1Q16 results will be affected by first time application of FRS16 & 41 whereby past recognition of fair valuation of biological assets will be reversed and replaced with cost less accumulated depreciation accounting policy which results in lower EPS and NBV. Our BUYs in the region are FR, AALI, LSIP, BAL, SOP and TAH.

Source: Maybank Research - 12 Apr 2016