Plantation Companies - DBS Research 2016-08-11: Take profit on near-term upside

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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 - Take profit on near-term upside

• Malaysian July 2016 output of 1.586m MT was lower than expected
• But exports spiked 21% m-o-m to 1.384m MT – on strong demand from China, the US and EU
• Palm oil ending inventory of 1.771m MT was also in line – despite 24% m-o-m drop in post-Eid domestic demand
• Take advantage of any near-term price strength to take profits. Top pick: BAL

July 2016 output recovery was less than expected. 

• Malaysia’s July 2016 palm oil output seasonally recovered by 3% m-o-m to 1.586m MT. This was 8% below our forecast of 1.715m MT – partly on the back of seasonal downtime during the Eid holidays; and partly due to a slower-than-expected yield recovery. 
• The average Fresh Fruit Bunch (FFB) yield in Sabah/Sarawak took another dip towards 1.53MT/ha from 1.55MT/ha in the previous month; while that in Peninsular edged up to 1.38MT/ha from 1.37MT/ha in the previous month. 
• We are maintaining our full-year estimate of 18.839m MT; as we expect yield recoveries to accelerate in 2HCY16. FFB output is forecast to rise 19% m-o-m in August 2016 to 1.881m MT, as harvesting picks up.

Exports jump led by China. 

• Palm oil exports spiked 21% m-o-m in July 2016 to 1.384m MT – in line with our forecast of 1.402m MT. Better demand were primarily led by shipments to China, the US and EU – which increased by 109%, 154% and 26% m-o-m, respectively. 
• Exports to India increased by a less buoyant 12% m- o-m. We anticipate this to gather pace in August and September – considering the declining domestic edible oil inventory – ahead of the Diwali festival on 30 October. The m-o-m rebound in July 2016 exports however was partly offset by a 24% m-o-m drop in post-Eid domestic palm oil consumption to 218k MT – while import volume shrank 35% m-o-m to 12.8k MT. These translated to an end-July 2016 inventory level of 1.771m MT – in line with 1.821m MT expected. 
• We project August 2016 palm oil export volume to recover 38% m-o-m to 1.548m MT and import volume at 17.6k MT – arriving at an end-August 2016 inventory forecast of 1.845m MT. 
• We continue to expect Malaysia’s palm oil inventory to peak at 2.151m MT by end-Nov 16; while output should peak at 2.068m MT in Oct 16.

Near-term price recovery. 

• We expect a short-lived palm oil price recovery on sequentially better August 2016 export data. However, as inventory picks up again, palm oil prices (FOB, spot basis) should be capped at c.RM2,600. YTD, CPO spot prices have averaged RM2,489 – or c.5% below our FY forecast (unchanged).

Our top picks. 

• We recommend investors to remain cautious and to take advantage of any near-term upside to realise some profit. 
• We currently have BAL as our sole BUY pick in our coverage.

Peer Comparison

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-08-11

DBS Vickers SGX Stock Analyst Report BUY REVIEW BUY 3.76 REVIEW 3.76

HOLD Maintain HOLD 1.82 Same 1.82

HOLD Maintain HOLD 0.50 Same 0.50

BUY Maintain BUY 0.81 Same 0.81

NOT RATED Maintain NOT RATED 0.33 Same 0.33