Plantation Companies - DBS Research 2017-03-10: Declining inventory to support prices

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

Plantation Companies - Declining inventory to support prices

• Malaysia’s February 2017 Crude Palm Oil (CPO) output fell 1% m-o-m to 1.258m MT – higher than 1.171m MT forecast.
• Exports dropped 14% m-o-m to 1.107m MT and were in line with 1.094m MT expected.
• End-February 2017 stock of 1.459m MT was in line; as domestic demand was higher than expected.
• Top picks: AALI, LSIP, TSH, BAL and FR.

Palm oil production declined 1% m-o-m. 

• Malaysia produced 1.258m MT of palm oil in February 2017 (-1% m-o-m) – c.8% ahead of 1.170m MT forecast. The flatter-than-expected sequential drop implies a whopping 21% y-o-y jump vs. 12% expected. 
• While FFB yields were seasonally lower in February, they were flatter in Peninsular Malaysia compared to the previous year. We doubt this trend will continue for the rest of the year; given the impact of El Nino in the early part of last year. 
• Based on full-year production of 19.4m MT (unchanged); we expect March palm oil output to increase 4% m-o-m (+7% y-o-y) to 1.307m MT.

Slower exports, as expected. 

• Given tight inventory and high prices, Malaysia’s February 2017 palm oil exports declined 14% m-o-m to 1.107m MT (vs. our forecast of 1.094m MT). The lower demand was attributable to sequential drops in shipments to China (-38% m-o-m), Turkey (-48% m-o-m), and Philippines (-33% m-o-m) – partly offset by higher shipments to the EU (+12% m-o-m) and Japan (+58% m-o-m). 
• We expect March exports to seasonally pick up 18% m-o-m to 1.306m MT – in view of recent price drop and restocking activities ahead of Ramadan – thus consuming almost all of expected March output. February 2017 palm oil imports eased 18% m-o-m to 40k MT, reflecting tight supply in Indonesia. March imports are now forecast to reach 32k MT.

Expect lower inventory in March 2017. 

• The February output, exports and 274k MT domestic consumption (vs. 226k MT expected) had depleted palm oil inventory to 1.459m MT – in line with expectations. 
• We expect end-March palm oil inventory to still drop 7% m-o-m to 1.353m MT (-28% y-o-y). Having imputed February data, we now expect inventory to bottom at 1.412m MT in June 2017 – raised from 1.082m MT previously – as we cut full-year usage to 18.9m MT from 19.7m MT, which we believe was too aggressive. 
• We continue to expect CPO prices to remain supported until July 2017. However, we now expect steeper price moderation thereafter.

Our recommendations. 

• We believe near-term upside risks (i.e. low yields, higher biodiesel blend in Indonesia/US, weaker Ringgit) still outweigh the downside risks (lower-than-forecast export demand and South American soybean bumper crop).
• However, we are reviewing our PKO price forecasts with downside bias. This would have slight impact on FY17F and FY18F earnings. 
• Within our coverage, our top picks are AALI, LSIP, TSH, BAL and FR.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2017-03-10

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