Maintain neutral: Malaysia’s crude palm oil (CPO) production increased for a second straight month in August, rising by 7.9% month-on-month (m-o-m) to 1.62 million tonnes. The fresh fruit bunch (FFB) yield also improved across Peninsular Malaysia, Sabah and Sarawak, rising by 8.7%, 3.2% and 12.6% year-on-year (y-o-y) respectively to 1.38 tonnes/ha, 1.28 tonnes/ha and 1.52 tonnes/ha.
For eight months of 2018 (8M18), total CPO production was down by 2.5% y-o-y to 12.04 million tonnes. We expect Malaysia’s CPO production to continue to improve in the next few months and peak in October or November, and we think that the 2018 production is likely to be slightly lower than 2017’s total CPO production of 19.92 million tonnes.
Palm oil exports in August decreased by 8.1% m-o-m (-26% y-o-y) to 1.1 million tonnes. This was the lowest level seen since February 2016 as key buyers such as Iran, the Philippines, Turkey, Pakistan and the European Union (EU) bought less of Malaysia’s palm oil products.
Nevertheless, this was slightly offset by higher palm oil exports to India, Vietnam and the US. Exports to Iran, the Philippines, Turkey, Pakistan and the EU were down 70.5%, 14.5%, 47.1%, 27.3% and 49% respectively while exports to India, Vietnam and the US rose by 5.8%, 12.1% and 44.7% m-o-m, respectively, to 139,000 tonnes, 50,000 tonnes and 47,000 tonnes.
For 8M18, total exports were down by 1.8% y-o-y to 10.5 million tonnes. The palm oil inventory in August went up for a third consecutive month, by 12.4% m-o-m to 2.49 million tonnes, as production exceeded exports.
Average Malaysian Palm Oil Board (MPOB) locally delivered CPO prices in August stood at RM2,183.50/tonne, down by 1.4% m-o-m (August 2017: RM2,633/tonne). For 8M18, CPO prices averaged RM2,363/tonne versus RM2,859/tonne for 8M17.
We expect CPO prices to trade higher than the current levels of RM2,200/tonne to RM2,250/tonne, as we think demand should pick up towards the fourth quarter of 2018, underpinned by exports and domestic consumption by the food and energy industries.
The El Niño-Southern Oscillation cycle can greatly influence the global weather, as these cycles can alter the normal weather patterns and surface temperatures, which can cause major disruption to the world’s agricultural production and supply. Based on the US National Oceanic and Atmospheric Administration climate advisory report, there is a 60% chance for El Nino to make an appearance during the fall and this rises to around 70% by winter of 2018/19.
Factoring in a CPO average selling price (ASP) of RM2,100/tonne to RM,2,400/tonne in the second half of 2018, we forecast a 2018 average CPO price of RM2,350/tonne (2017 CPO ASP: RM2,783/tonne). Our CPO ASP assumptions for 2019 and 2020 are RM2,400/tonne and RM2,500/tonne. Without any clear rerating catalyst for the sector, we maintain our “neutral” rating.
We make no changes to our earnings forecasts for the plantation companies we cover. Across our coverage universe, we have a “buy” rating on Genting Plantations Bhd; “hold” ratings on FGV Holdings Bhd, Kuala Lumpur Kepong Bhd, Sime Darby Plantation Bhd, Ta Ann Holdings Bhd and Jaya Tiasa Holdings Bhd; and “sell” ratings on IJM Plantations Bhd, Hap Seng Plantations Holdings Bhd, IOI Corp Bhd and WTK Holdings Bhd.
For plantation sector exposure, we like Genting Plantations as we expect higher FFB and CPO production coupled with an increase in contribution from the downstream plantation segment to drive earnings growth going forward.
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; ii) a decline in CPO production that is not offset by higher CPO selling prices; iii) delays in the implementation of biodiesel mandates in Indonesia and Malaysia; and iv) unfavourable policies and taxes.
Meanwhile, key upside risks include a strong rebound in the global economy as well as demand and prices of vegetable oils. — Affin Hwang Capital Research, Sept 13