Plantation Companies - DBS Research 2016-09-14: Beware of the backwardation

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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 - Beware of the backwardation

• Malaysia’s August 2016 Crude Palm Oil (CPO) output of 1.702m MT was 10% lower than expected. 
• Exports concurrently jumped 31% m-o-m to 1.812m MT – on strong demand from India, China, and the EU. 
• Palm oil stockpile consequently dropped 17% m-o-m to 1.464m MT – 21% below estimate. 
• Backwardation in CPO futures suggests near-term output recovery and slower exports. 

August 2016 output recovery was less than expected.

• Malaysia’s August 2016 CPO output seasonally recovered by 9% m-o-m to 1.702m MT. This was 10% below our forecast of 1.881m MT – mainly given still-low FFB yields in Peninsular Malaysia (vis-à-vis the same period last year). 
• The slower-than-expected output growth YTD led us to cut Malaysia’s full-year palm oil output forecast to 18.429m MT – or c.2% below our previous expectations – as in our view, the yield recovery may take longer than previously anticipated. This implies that 2HCY16 output should rebound 43% vs. 1HCY16. 
• Imputing August data, we now expect September 2016 palm oil production to expand 18% m-o-m to 2.006m MT Exports jump led by India. 
• August 2016 palm oil exports on the other hand spiked 31% m-o-m to 1.812m MT – 17% ahead of our forecast of 1.548m MT. The jump was driven by shipments to India, China, and the EU – which expanded 126%, 42% and 24% m-o-m respectively. The strong demand out of India reflects restocking activities ahead of Diwali festival and represents the highest monthly volume this year. 
• Given the improved monsoon season, we expect demand to stay relatively robust for the remainder of the year. The m-o-m rebound in August 2016 exports was accompanied by 40% m-o-m drop in imports to 7.8k MT. These translated to an end-August 2016 inventory level of 1.464m MT – 21% below forecast of 1.845m MT.

Worst is over. 

• We project September 2016 palm oil export volume to shrink 17% m-o-m to 1.508m MT as inventories are refilled. Imputing our revised numbers; end-September 2016 inventory is forecast at 1.690m MT (cut from previous expectation of 1.987m MT). 
• We now expect Malaysia’s palm oil inventory to peak at 2.000m MT by end-November 2016 (cut from 2.151m MT previously); while output should peak at 2.007m MT in October 2016 (cut from 2.068m MT previously).

Beware of backwardation. 

• YTD, CPO spot prices have averaged RM2,525 – or c.4% below our FY forecast (unchanged). Reflecting a relatively tight spot market and anticipated seasonal output recovery from September, the palm oil futures market for October and November deliveries are priced 6% and 9% lower than current spot. 
• We recommend investors to remain cautious and to take advantage of any near term upside to realise some profit. 
• Within our coverage, BAL remains significantly undervalued relative to its volume growth prospects.

Peer Comparison

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-09-14

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 3.13 Same 3.13

BUY Maintain BUY 1.80 Same 1.80

HOLD Maintain HOLD 0.48 Same 0.48

BUY Maintain BUY 0.81 Same 0.81

NOT RATED Maintain NOT RATED 0.33 Same 0.33