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This article first appeared in The Edge Financial Daily on October 12, 2018

Plantation sector
Maintain neutral:
The Malaysia Palm Oil Board’s September 2018 palm oil stocks increased slightly by 1.4% month-on-month (m-o-m) to 2.54 million tonnes versus market expectations of a decline of between 0.6% and 1.4%. The deviation was mainly due to a lower-than-expected rise in exports (+47.2% m-o-m) and lower domestic usage (-20.6% m-o-m). Note that the market was expecting an increase in exports of 50%. Production stood at 1.85 million tonnes, which is quite in line with expectations of 1.86 million tonnes. Meanwhile, domestic usage decreased by 23.2% m-o-m to 260,000 tonnes.

 

Fresh fruit bunch (FFB) yield increased by 17.3% m-o-m to 1.63 tonnes per ha, this has filtered down to higher crude palm oil (CPO) production of 1.85 million tonnes (+14.4% m-o-m, +4.1% year-on-year). This marked its third m-o-m increase as palm oil entering a seasonal uptrend in output phase. Cumulatively, the year-to-date (YTD) production stood at 13.9 million tonnes (-1.7% y-o-y) with an FFB yield of 12.23 tonnes per ha, which was a tad lower than 12.69 tonnes per ha recorded a year ago.

We expect production to peak by October before coming off in November and December. Meanwhile, CPO production is expected to hit 19.5 million tonnes this year (-2% y-o-y).

Exports increased by 47.2% m-o-m to 1.6 million tonnes, the highest since September 2016. All major destinations reported higher exports, except for China, which dropped by 1.5% m-o-m. Exports to the European Union (EU) were surprisingly high at 228,000 tonnes, an increase of almost threefold. Meanwhile, on a m-o-m basis, exports to India, Pakistan and the US increased by 64%, 86% and 4.5%, respectively. YTD, total exports dropped 0.7% y-o-y to 12.1 million tonnes. Looking ahead, cargo surveyors, Intertek and AmSpec Agri estimate that the palm oil exports for the first 10 days of October to decrease by 39.3% and 39.1% to 297,000 and 308,000 tonnes, respectively.

According to Australia’s Bureau of Meteorology, a recent warming of the Pacific Ocean has led to a 70% chance of an El Nino weather phenomenon by the end of the year. Thus, the agency has upgraded the chances of an El Nino forming from a watch to an alert.

To recap, during the 2015 to 2016 El Nino event, an alert of the event was issued in April 2015 and its peak in November 2015. El Nino can cause a negative lag impact on palm oil production and lend support to palm oil prices. This is in line with our view that CPO price may edge higher in the fourth quarter (4Q) of 2018. Meanwhile, the zero export tax holidays for CPO and the revision of high biodiesel use (B20) in Indonesia could also help to strengthen CPO prices. No change to our average CPO price forecast of RM2,450 per tonne in 2019.

We reiterate our “neutral” recommendation on the plantation sector. Our “buy” calls include SD Plantation, IOI Corp and KFIMA. Meanwhile, maintain “hold” on Wilmar as near-term catalysts have already been priced in. Lastly, maintain “sell” on KLK, FGV, IJMP, TSH, United Malacca and IFAR, due to pricey valuation. — TA Securities Research, Oct 11

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