Plantation - Gradual Recovery In Output Expected From 2Q17
- Malaysia’s CPO output saw another weak month in February (being a shorter month), which resulted in a 5.3% MoM fall in stock levels to 1.46m tonnes.
- We expect output to gradually recover from 2Q17 onwards, before the rate of recovery picks up in 2H17.
- Exports to China could also remain relatively lacklustre, leading to a further weakening of CPO prices.
- We maintain our NEUTRAL sector recommendation for now, with Top Picks being companies that would still see strong FFB growth from newly maturing areas, as well as stocks with undemanding valuations.
Malaysia’s CPO production fell 1.4% MoM in February, but was up 20.7% YoY.
- On a YTD basis, production climbed 16.7% YoY. We expect Malaysia’s CPO output to post a 10-12% growth YoY in 2017.
Exports fell 14% MoM in February
- Exports fell 14% MoM in February (post-Lunar New Year festive demand and due to the shorter month) but were relatively unchanged YoY.
- Exports to China/India fell 38.3%/4.2% MoM respectively. This was partly offset by a 11.9% lift in exports to the EU. We may continue to see weak exports to China ahead, as it absorbs its soybean oil from crushing of its soybean reserves. Offsetting this would be higher demand from India, given its low stock levels currently.
Inventory fell 5.3% MoM
- Inventory fell 5.3% MoM to 1.459m tonnes in February from lower output.
- Over the next few months, as production remains weak and exports remain lacklustre, inventory should remain range-bound, ie 1.5-1.9m tonnes.
4Q16 results wrap.
- The recent results season saw mostly in-line results for the regional planters, with ten players booking in-line results, four which surprised on the upside (Bumitama Agri, Genting Plantations, IOI Corp and London Sumatra) and one below (TSH).
- FFB output improved strongly QoQ in 4Q16. YoY, only the companies with either pure or substantial Indonesian exposure saw improvements in output. Average CPO prices achieved also improved, while PK and PKO prices continued to stay at elevated levels in 4Q16, due to the supply crunch of coconut and other lauric oils.
- At the recent Palm Oil Conference 2017, most speakers guided for lower PK and PKO prices in the coming months, on the back of the anticipated output recovery. Most companies guided for strong FFB recovery in 2017, with the majority targeting double-digit growth rates coming from a low base in 2016. For those with downstream operations, we saw weaker QoQ margins, due to the impact of higher CPO and PK feedstock prices.
- Going forward, most companies expect stronger margins at the downstream division, as selling prices have risen and raw material prices are expected to moderate.
- We expect the current strong CPO prices to moderate after 1Q17, as CPO production recovers more significantly and soybean from South America starts being harvested. We keep our MYR2,500/tonne CPO price assumption for 2017.
- Top Picks remain Kuala Lumpur Kepong (KLK), Golden Agri and London Sumatra.
- We also like Sime Darby as a restructuring play.
- Risks include extreme climate conditions, changes in biofuel policies and to supply-demand dynamics of global vegetable oils.