13/09/2017 (The Edge Markets) - Plantation sector Maintain neutral: Malaysian crude palm oil (CPO) production decreased slightly by 0.9% month-on-month (m-o-m) to 1.81 million tonnes in August after a strong rebound in July. CPO production in Peninsular Malaysia and Sabah fell by 0.7% and 5.3% m-o-m respectively to 980,000 tonnes and 440,000 tonnes, but this was partially mitigated by a 3.8% m-o-m increase in Sarawak’s production to 390,000 tonnes. Peninsular Malaysia and Sarawak recorded higher fresh fruit bunch (FFB) yields of 1.74 tonnes/hectare (ha) [+3.6% m-o-m] and 1.55 tonnes/ha (+5.4% m-o-m), while Sabah recorded a lower FFB yield of 1.5 tonnes/ha (-7.4% m-o-m). For eight months of 2017 (8M17), total CPO production rose by 13.6% y-o-y to 12.35 million tonnes. The recovery was largely anticipated after the 2015-2016 El Nino phenomenon badly affected production in 2016.
Palm oil exports increased for a second consecutive month by 6.4% m-o-m in August to 1.49 million tonnes. Among the key buyers, exports to Iran, India, the Philippines and China rose by 330.2%, 13.5%, 7.3% and 2.9% m-o-m respectively, while exports to the European Union, Vietnam, the US and Pakistan fell by 17.2%, 15.9%, 13.3% and 11.9% m-o-m respectively. For 8M17, total exports increased by 2% year-on-year to 10.71 million tonnes. Palm oil inventory in August rose by 8.8% m-o-m to 1.94 million tonnes, the highest level over the past 18 months (August 2016 inventory: 1.46 million tonnes). The current stock level is equivalent to 1.3 months of export, which is sufficient and manageable, in our view.
For August, the average Malaysian Palm Oil Board locally-delivered CPO prices were higher at RM2,633/tonne, up marginally by 0.1% m-o-m from RM2,629.50/tonne in July (August 2016: RM2,602/tonne; 8M17 CPO average selling price: RM2,859/tonne). Due to the steeper increase in soybean oil prices compared with the increase in CPO prices for August, the soybean oil premium over CPO widened to about US$181 (RM761.65)/tonne, up US$9/tonne m-o-m.
No changes have been made to our plantation companies’ earnings forecasts. Across our coverage universe, we have “buy” ratings on Genting Plantation Bhd (RM10.66) and Ta Ann Holdings Bhd (RM3.65); “hold” ratings on Kuala Lumpur Kepong Bhd (RM24.74), Felda Global Ventures Holdings Bhd (RM1.71), Sime Darby Bhd (RM9.14), IJM Plantations Bhd (RM3.05), Hap Seng Plantations Holdings Bhd (RM2.63) and Jaya Tiasa Holdings Bhd (RM1.03); while IOI Corp Bhd (RM4.53) and WTK Holdings Bhd (RM0.77) carry “sell” ratings. For plantation-sector exposure, Genting Plantations is our top sector pick. We continue to like the company as we expect rising mature plantation area and higher FFB and CPO production to drive growth. Sector-wise, we maintain our “neutral” rating for the plantation sector.
Key downside risks to our “neutral” rating on the plantation sector and stock calls include:
i) weaker-than-expected demand and higher-than-expected production lowering prices of vegetable oils; and
ii) declines in CPO production that are not offset by higher CPO selling prices. Meanwhile, key upside risks include a strong rebound in the global economy as well as demand for and prices of vegetable oils. — Affin Hwang Capital, Sept 12