Plantation Companies - DBS Research 2017-04-11: Temporary demand weakness

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

Plantation Companies - Temporary demand weakness

• Malaysia’s March 2017 Crude Palm Oil (CPO) output seasonally rose 16% m-o-m to 1.464m MT – higher than 1.307m MT forecast
• This caused end-March inventory to expand 6% m-o- m to 1.554m MT – 15% higher than expected
• Though rising 14% m-o-m to 1.266m MT, March 2017 exports were weaker than 1.306m MT expected
• Buy on weakness: AALI, LSIP, TSH, BAL and FR. 

Stronger-than-expected March 2017 output. 

• Malaysia’s palm oil production rose 16% m-o-m to 1.464m MT in March 2017 – ahead of 1.307m MT forecast. 
• Higher-than-expected output was driven to a large extent by strong 38%, 27% and 19% m-o-m jumps in FFB yields in Selangor, Pahang and Sabah respectively – a month earlier than previously anticipated. FFB yields in Peninsular Malaysia expanded 20% m-o-m vs. 14% m- o-m in Sabah/Sarawak. 
• Imputing March 2017 data; we now expect April 2017 palm oil output to increase 2% m-o-m (+14% y-o-y) to 1.487m MT.

Exports weighed by India’s demonetisation? 

• Higher-than- expected output caused Malaysia’s palm oil inventory to swell 6% m-o-m to 1.554m MT by end-March 2017 – higher than 1.353m MT forecast – as exports grew by slower-than-expected 14% m-o-m. 
• March 2017 exports were driven by shipments to Turkey (+118% m-o-m) and India (+28% m-o-m), partly offset by lower deliveries to the EU (-12% m-o-m). But compared to the same period last year, the drop in India’s imports (-48% y- o-y) caused much of the weakness. This may have represented a lagged impact from banknote demonetisation undertaken in November 2016; as we expect India’s 2017 palm oil demand to remain flat y-o-y. 
• As at end-February 2017 (latest data), India’s vegetable oil inventory stood at 1.6 months of annual consumption vs. 1.9 months the year before. 
• Malaysia’s April 2017 palm oil exports are forecast to remain flat at 1.264m MT – before rising to 1.532m MT in May on Ramadan demand.

Expect higher inventory in April 2017. 

• March 2017 palm oil imports unexpectedly jumped 153% m-o-m to 102,000 MT. We suspect this may have been driven by strong production in Indonesia – as export taxes there were not due for a cut until April 2017. 
• Assuming imports normalise to 38,000 MT in April 2017, we expect Malaysia’s palm oil inventory to expand towards 1.636m MT (+5% m-o-m) by month’s end.

Our recommendations. 

• Current weakness in palm oil prices may likely continue this month – before higher seasonal demand kicks in during May 2017 and Indonesia’s biodiesel allocation are announced by end-April 2017. 
• We maintain Malaysia’s production forecast of 19.4m MT this year; hence do not anticipate March 2017 production momentum to be maintained in subsequent months. 
• For exposure, we recommend buying AALI, LSIP, TSH, BAL and FR on weakness.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2017-04-11

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