Sector update:
Regional Plantation (Neutral),
Disappointing Output Supports Bullish CPO Price Signal
Regional Plantation (Neutral),
Disappointing Output Supports Bullish CPO Price Signal
Malaysia’s
CPO production unexpectedly fell MoM in October, which combined with a small
reduction in exports, resulted in a minimal rise in inventory. This indicates
that production should taper off from hereon, having peaked in September,
providing a short-term bullish signal for CPO prices. We now expect prices to
remain strong until 1Q17, when signs of a production recovery take place. No
change to our NEUTRAL sector call, with Top Picks KLK, Sime Darby, Golden Agri
and London Sumatra.
¨ Malaysia’s CPO
production fell 2.2% MoM in October, while YTD production decline widened to
15.6% YoY. This was an unexpected decline, which could indicate that the peak
production period is over in Malaysia, having peaked in September. We
understand that production in Indonesia could still be on the rise in Oct/Nov,
as El Nino hit Malaysia first before affecting Indonesia.
¨ Exports fell in
October (-1.4% MoM), as
China continued to utilise its rapeseed oil and soybean stocks. Exports to
China saw a MoM decline of 5.2% in October, while exports to India and the US
fell by 22.2% and 10.1% respectively.
Malaysia’s YTD-Sep exports dropped 7.3% YoY,
with wider declines to China (-29%), India (-15.4%), US (-13%) and the EU
(-12%). We expect demand from India to improve in the coming months, due to the
change in import taxes, while China should see some festive demand prior to
Chinese New Year.
¨ Inventory rose 1.8%
MoM to 1.57m tonnes
in October due to lower exports, bringing the stock/usage ratio to 8.4% (Sep:
8.3%), below the 12-year average of 10%. With a likely slowdown in production
and higher exports, inventory should remain range bound over the next few
months, ranging 1.5-1.8m tonnes.
¨
Recent
developments:
i. South American soybean planting partially
delayed due
to wet weather in Argentina and Brazil. Planting is at 6-8% of the intended
area currently, vs the 12-16% average. If this continues, it would help reduce
high soybean stocks caused by four years of bumper crops in the US;
ii. China’s palm oil imports remain weak, down 38.4% YoY in
YTD-Sep, due to high stockpiles – 6.2m tonnes of soybean, 3.5m tonnes of
rapeseed oil. We understand China plans to release 0.1m tonnes of rapeseed oil
into the market per month, which would continue to dampen demand.
iii. India’s palm oil imports fell 10.3% YoY in YTD-Sep. However,
this should improve due to the recent cut in import taxes favouring palm oil.
We expect palm oil’s market share to rise from the current 56%, while there
should also be some switching back to buying crude vs refined oils.
¨ Still NEUTRAL. Given the
unexpected reversal of output in October, we now believe Malaysian output is
likely to disappoint for the rest of 2016 and 1Q17, as it plateaus off from the
seasonal peak. This would result in CPO prices remaining at stable levels of
MYR2,600-2,900/tonne for the next few months. After 1Q17 however, production is
expected to recover more significantly, thereby lowering CPO prices. We keep
our MYR2,500/tonne CPO price assumption for 2016-2017. Our regional Top Picks
remain Kuala Lumpur Kepong, Golden Agri and London Sumatra. We also like Sime
Darby as a restructuring play.
Kindly
click the following link for the full report: Disappointing Output Supports Bullish CPO Price Signal
Hoe Lee Leng
Deputy Director
Regional Head of
Plantations
RHB Securities
Malaysia
