Plantation - RHB Invest 2017-04-11: Inventory Restocking Has Begun

Plantation Companies BUMITAMA AGRI LTD. P8Z.SI FIRST RESOURCES LIMITED EB5.SI GOLDEN AGRI-RESOURCES LTD E5H.SI WILMAR INTERNATIONAL LIMITED F34.SI

Plantation - Inventory Restocking Has Begun

Malaysia’s CPO output recovered by 16.3% MoM and 20.1% YoY in March. This led to the country’s inventory rising 6.5% MoM to 1.55m tonnes in March.
We believe this is the beginning of the CPO inventory replenishment cycle, which we expect to come about as CPO productivity improves and demand remains lacklustre.

We keep our UNDERWEIGHT rating on the sector across the region. Our top SELL is Lonsum, while our top BUY is Sime Darby. In Malaysia, IOI Corp is our top SELL.
Key risks include weather extremities and a change in the demand dynamics.

On a YTD basis, production climbed 17.9% YoY. We expect Malaysia’s CPO output to post a 10-12% growth YoY in 2017.

Exports rose 14.3% MoM in March (after a short February) but decreased 5.3% YoY. Exports to China rose 24.8% YoY but this was offset by a 42% YoY decline to India and a 31.4% decline to US and a 18.7% decline to the EU. We believe exports would continue to be under pressure in 2017 from environmental issues in the EU, a strong domestic crop in India and higher soybean reserves being crushed in China.

Inventory rose 6.5% MoM to 1.554m tonnes in March. We believe this is the start of the rise of inventory levels, as production levels recover in a more significant manner.
Stock/usage ratios are now at 9% (from 8.5% in Feb), still slightly lower than the 15-year average of 9.5%, but are on a declining trend.

The European Parliament passed a non-binding resolution to urge the European Commission to phase out the use of vegetable oils for biofuels by 2020. This would be negative, if it was implemented. 46% of palm oil used in Europe in 2016 (or 3.5m tonnes) was used as a biodiesel by automobiles;
The Indonesian Government has changed the pricing formula for biodiesel to CPO price plus USD100/tonne (from USD125/tonne), which takes effect in May. We estimate this would only fund an additional 0.2m tonnes of biodiesel output to a maximum of 2.44m tonnes – which is still far from the 4.4m target for 2017;
The US Department of Agriculture (USDA) announced planting intentions for soybeans for 2017 – an increase of 7% of soybean acreage and a 4% decline in corn acreage. This means more soybean crop coming into the market in the US from Sep 2017 onwards, implying an estimated +10.4% YoY increase in 2017.

We continue to believe CPO prices would be on a downtrend going forward, given the abundant supply coming into the market in 2H17, as well as the fourth bumper crop of soybeans coming out of South America from April onwards.
We maintain our UNDERWEIGHT sector rating.
Regionally, our top SELL is London Sumatra (Lonsum) while our top BUY is Sime Darby.

Hoe Lee Leng RHB Invest | Hariyanto Wijaya CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-04-11

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.890 Same 0.890

NEUTRAL Maintain NEUTRAL 1.800 Same 1.800

NEUTRAL Maintain NEUTRAL 0.390 Same 0.390

NEUTRAL Maintain NEUTRAL 3.620 Same 3.620