Agribusiness sector
Maintain neutral call: Findings from a survey of 19 plantation areas by the CIMB Futures team reveal that Malaysian crude palm oil (CPO) output fell 7% month-on-month (m-o-m) to 1.37 million tonnes in January. Palm oil exports grew by approximately 6.2% m-o-m, based on export statistics released by cargo surveyors SGS and ITS. Overall, we estimate that Malaysian palm oil inventories may have fallen by 10.7% m-o-m to 1.49 million tonnes at end-January. The official figures will be released on Friday.

The projected 7% m-o-m drop in fresh fruit bunch output is lower compared with the historical January m-o-m average decline of 13.5% over the past five years. This is also lower than our earlier projection of a 10% m-o-m decline in output as the El Nino effect fades. Year-on-year (y-o-y), CPO output is expected to improve by 21% in January. This represents the second consecutive month of a y-o-y rise in output. Our survey reveals that output from Peninsular Malaysia, Sarawak and Sabah estates fell 12.8%, 2.4% and 5.8% m-o-m respectively.

We estimate that Malaysian palm oil exports increased by some 6.2% m-o-m in January, based on estimates from SGS (4.3% m-o-m) and ITS (8.1% m-o-m). This is in direct contrast to our earlier projection for exports to fall by 5% m-o-m, thanks to stronger-than-expected demand from the US (15% m-o-m) and other countries (34% m-o-m), which more than offset weaker demand from China, India, the European Union and Pakistan.

The expectation of lower stocks in January could support or boost near-term CPO prices. Our projected end-January stock level of 1.49 million tonnes represents a 36% decline from the year-ago level and makes up around 1.12 months’ coverage of the average monthly palm oil exports from Malaysia.

We expect palm oil producers to report a strong set of fourth-quarter (4Q) earnings both on a quarter-on-quarter and y-o-y bases, as higher palm product prices more than offset lower output. Palm oil output from Malaysia fell 7% y-o-y and 6% q-o-q in 4Q of 2016 (4Q16) due to the impact of the El Nino induced drought. However, CPO prices rose 36% y-o-y and 13% q-o-q to average RM2,935 per tonne, while palm kernel (PK) prices jumped 80% y-o-y and 14% q-o-q to RM3,053 per tonne in 4Q16. Average PK prices in 4Q16 surpassed that of CPO for the first time in many years.

CPO prices have been holding firm above RM3,000 per tonne since the start of 2017 due to the weak ringgit and tight stockpile. In January, CPO prices averaged RM3,268 per tonne while PK prices surged to another monthly record high of RM3,659 per tonne. We project CPO prices will trade in the RM3,000 to RM3,300 per tonne range in February. We maintain our “neutral” stance and average CPO price forecast of RM2,600 per tonne for 2017. Our top picks in the region are PT Astra Agro Lestari Tbk, First Resources Ltd and Genting Plantations Bhd. —  CIMB Research, Feb 4