Sector update:
Regional Plantation (Neutral),
Restocking Activities + Hari Raya Month = Lower Inventories
Regional Plantation (Neutral),
Restocking Activities + Hari Raya Month = Lower Inventories
Malaysia’s
inventory levels fell slightly in July, due to the weaker output during the
Hari Raya month and restocking activities at the two main import markets, India
and China. We expect inventory levels to start climbing again from next month,
however, as we head towards the peak production period. The upcoming 2Q16
results season should see more companies meeting expectations, as most of the
negative news should already have been factored in. We keep our NEUTRAL sector
call and top picks of KLK in Malaysia, Golden Agri in Singapore and London
Sumatra in Indonesia.
¨
Malaysia’s
CPO production rose 3.5% MoM in July, although it is still down 12.7% YoY, while
YTD production decline narrowed to 15.5%. We expect FFB output to rise further
from August onwards as we head to the next seasonal peak.
¨
Exports
recovered in July, rising 21.2% MoM, on restocking activities to China (+209%),
India (+11.9%), EU (+25.9) and the US (+253.6%).
¨
This
brought Malaysia’s YTD-July exports to -8%, with China’s export decline
narrowing to -48% YoY (from -52%), US to -5% (vs -8%) and the EU to -13% (from
-14%).
¨
Inventory
fell a slight 0.2% MoM to 1.7m tonnes, due to the strong export recovery, bringing
the stock/usage ratio up to 10% (June: 10.2%), which is in line with the
12-year average. We expect inventory levels to start climbing again from next
month, as production picks up pace.
¨
Recent
developments:
i. La Nina’s probability has
receded, now
at 58%, vs 65% in mid- June. Only two of eight climate models exceed La Nina
thresholds for an extended period, which could mean that if La Nina does
develop, it would most likely be weak;
ii. China’s edible oil imports fell 10.8% in
YTD-June while palm oil imports fell 24.6% YoY; India’s edible oil imports grew
7.3% YoY in YTD-June, while palm oil imports slid 6.2%. We expect a reversal of
this negative trend in July, as inventory levels have shrunk, and buying is
returning for the Deepavali and year-end festive period;
iii. India’s edible oil import demand may slow
going into 2017, however, on the back of the improving outlook for its own
oilseed production, which is set to grow by 0.9m tonnes (+19%). This could
reduce edible oil import growth to 3-4% in 2017) from a three-year CAGR of 13%
previously (Figure 7); and
iv. 2Q16 results preview – we expect most (13
of 16) companies to post in-line results, as we expect a recovery in FFB output
in 2H16. So far, Astra Agro has disappointed, with Genting Plantations and Sime
Darby likely to post slightly lower-than-expected earnings (Figure 2).
¨
No
change to our NEUTRAL sector call. We expect CPO prices to trade at
MYR2,200-2,500/tonne in the next few months, before posting a moderate recovery
towards the year end, due to seasonality. We continue to watch out for any
turnaround in demand growth as well as the development of La Nina.
Best regards,
Hoe Lee Leng
Deputy Director
Regional Head of
Plantations
RHB Securities Malaysia
