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This article first appeared in The Edge Financial Daily, on October 16, 2015.

 

Plantation sector
Maintain neutral:
Production declined 4.5% month-on-month (m-o-m) to 1.959 million tonnes. The latest data from the Malaysian Palm Oil Board (MPOB) shows that crude palm oil (CPO) production finally declined in September, slipping by 4.5% m-o-m to 1.959 million tonnes versus 2.051 million tonnes in August 2015 (year-on-year [y-o-y]: +3.3%), indicating the seasonal production downtrend has begun. 

Year to date (YTD), CPO production increased marginally by 1.45% y-o-y to 14.87 million tonnes contributed by Peninsular Malaysia that rose by 1.2% y-o-y against Sabah and Sarawak that fell by 7.1% y-o-y (Sabah: -7.9% y-o-y; Sarawak: -3.5% y-o-y). The reasons for this being production has been affected by the delayed impact of adverse weather condition that happened early this year in Sabah and Sarawak. As such, we assume that palm oil production in Sabah will continue to be affected in the next six to 12 months due to the spillover effect of bad weather from the drought that took place in the second half of February and first half of April 2015.

Stockpiles climbed to 2.63 million tonnes. As expected, stockpiles mounted in September despite the surge in palm oil exports amid the drop in production. Stocks climbed 5.46% m-o-m to 2.628 million tonnes (+25.73%: y-o-y), the highest stockpile ever recorded as palm oil imports m-o-m increased by 15.1% (y-o-y: +97.35%) to 75.96 thousand tonnes from 66.01 thousand tonnes the month before (YTD: +251.34%). 

We are of the view that stockpiles could remain above the two million mark until the end of this year though it may decline from the current level as production is going to be in the seasonally downward trend.  

Export volumes surged 4.4% m-o-m to 1.678 million tonnes. Palm oil export volumes in September 2015 climbed 4.4% m-o-m to 1.678 million tonnes compared with the previous month of 1.608 million tonnes (+2.1% y-o-y). The increase in palm oil exports was due to better demand from India, Vietnam, Iran, the Philippines, Japan and Benin. We believe India was replenishing its palm oil stocks ahead of Deepavali as well as ahead of the increase in palm oil import tax that began on Sept 20. 

YTD, the palm oil export volume was almost flat or increased marginally by 0.57% to 12.73 million tonnes against 12.66 million tonnes in the same period in 2014. The decline of imports from China is offset by India and the European Union with offtakes totalling 2.52 million tonnes and 1.73 million tonnes respectively.

Influenced by the weak sentiment, the plantation sector bellwether index in YTD September 2015 slipped by 9.25%, against the FBM KLCI that only dropped by 7.96%.  It ended September 2015 at 7,157.85, 14% lower y-o-y. YTD, PPB Group Bhd’s share price has again led its peers after surging by 7.83% while other stocks showed negative performances. The worst performer YTD was Felda Global Ventures Holdings Bhd after its share price dipped by 31.2% followed by TH Plantations Bhd  at 19.4%, TSH Resources Bhd at 16.5% and Sime Darby Bhd at 15.2%.

The three-month CPO futures price rallied in the last week of September with affirmative movement carried over to Oct 6, 2015, which saw the CPO futures at their highest intraday level of RM2,460 per tonne (six-year intraday low of RM1,863/tonne on Aug 25, 2015) on Sept 29, 2015, before ending the month at RM2,375/tonne. 

Aligned with the derivatives market, the MPOB’s CPO price for September 2015 also rallied in the last week of September after increasing marginally 0.8% m-o-m to an average of RM1,986/tonne (-3.4% y-o-y). 

Meanwhile, the MPOB’s average CPO price YTD reached RM2,170.06/tonne, slipping by RM314.55/tonne or 12.7% lower against RM2,484.61/tonne recorded in the same period last year. At this stage, we maintain our “neutral” call on the plantation sector, but if the landscapes change, we may review our call on the sector. At this junction, our average CPO target price (TP) is RM2,150/tonne for 2015 and RM2,300/tonne for 2016 stays. 

We remain positive on the long-term outlook of the oil palm plantation sector as we believe the key CPO price drivers are still in place. However, we posit that the CPO price rally may not sustain as supply is expected to remain elevated while demand will take time to catch up and hence, lead to high stock levels. — M&A Securities, Oct 15

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