Plantation Companies - DBS Research 2016-07-12: Weak exports priced in

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Plantation WILMAR INTERNATIONAL LIMITED F34.SI  FIRST RESOURCES LIMITED EB5.SI  INDOFOOD AGRI RESOURCES LTD 5JS.SI  BUMITAMA AGRI LTD P8Z.SI  GOLDEN AGRI-RESOURCES LTD E5H.SI 

Plantation Companies - Weak exports priced in

• Malaysian Jun-16 output of 1.533m MT was in line with expectations.
• But exports dropped 12% m-o-m to 1.132m MT – 27% below forecast – on 49% lower shipments to India.
• This was only partly mitigated by a 15% m-o-m rise in domestic demand and lower imports; which lifted palm oil stockpile to 1.776m MT – 23% above forecast.
• CY16F export estimates cut 1% to 16.931m MT. Top pick: Wilmar.

Expect Jul-16 output recovery. 

• Malaysia’s Jun-16 palm oil output seasonally recovered 12% m-o-m to 1.533m MT, in line with our forecast of 1.548m MT. 
• Average Fresh Fruit Bunch (FFB) yield in Sabah/Sarawak recovered 20% m-o-m – outpacing that in Peninsular, which picked up 9% m-o-m. 1HCY16 output of 7.590m MT thus represents 40% of our full-year estimate of 18.839m MT. 
• We expect Jul-16 output to rise by another 12% m- o-m to 1.715m MT. This year’s seasonal expansion would be partly offset by lower productivity due to lagged impact of CY15 El Nino; and to some extent the Eid break in early Jul-16.

India is drawing down own inventory. 

• Jun-16 palm oil exports registered an unusually steep 12% m-o-m drop to 1.132m MT. 
• The weaker volume mainly reflects 49% lower shipments to India – the biggest palm oil destination – to just 159k MT. India’s lower import volume was in spite of a decline in May-16 edible oil inventory and typically higher Eid demand. 
• Palm oil exports to the US, Philippines, and Vietnam also dropped by 49%, 37%, and 21% respectively, in line with seasonal trend. 
• Weak export markets were only partly mitigated by a 15% m-o-m rise in domestic palm oil consumption to 294k MT and 2% lower imports to 20k MT. These translated to end Jun-16 inventory level of 1.776m MT – 23% higher than the 1.445m MT expected. 
• We project a 24% m-o-m expansion in Jul-16 exports to 1.402m MT, as we expect India and China to replenish their edible oil stockpiles. Palm oil imports are forecast to remain subdued at 18.5k MT. Imputing Jun-16 data, we expect end-Jul-16 inventory level to continue rising towards 1.821m MT; mainly reflecting output recovery. 
• Having trimmed CY16F export demand by 1%; we now expect Malaysia’s palm oil inventory to peak at 2.157m MT by end-Nov-16.

No near-term catalysts. 

• Based on our revised forecasts, there may be a short-lived palm oil price recovery on sequentially better Jul-16 export data – although we no longer expect palm oil prices to peak at RM2,900 this year. 
• At the prospect of flatter price outlook, we believe upstream counters lack any near-term catalysts.

Our top picks. 

• We continue to recommend Wilmar International as our pick for the sector (BUY; TP: S$3.76). We believe Wilmar would benefit from expanded presence in India through Adani- Wilmar’s proposed JV with Ruchi Soya. Wilmar continues to benefit from biodiesel allocation in Indonesia and from y-o-y higher palm oil prices for its plantations segment.

Peer Comparison

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-07-12

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.76 Same 3.76

HOLD Maintain HOLD 1.82 Same 1.82

HOLD Maintain HOLD 0.50 Same 0.50

HOLD Maintain HOLD 0.91 Same 0.91

NOT RATED Maintain NOT RATED 0.33 Same 0.33