Danareksa Equity Snapshot – Plantation Sector (OVERWEIGHT) Oct 18 Inventory:Up But Below Expectations
November 13, 2018 09:38 WIB
Malaysia’s palm oil stockpile climbed further to 2.72mn tons in Oct 18 (+23.6% YoY, +7.6% MoM), albeit missing the consensus estimate of 2.86mn tons, due to stronger-than-expected exports performance in Oct 18. We believe the CPO price has now reached its bottom since the low crop season is approaching. We are more positive on the CPO price outlook in FY19 given the prospect for slower supply growth combined with stronger demand boosted by the roll-out of the B20 mandate as well as stronger CPO demand from India and China. Maintain OVERWEIGHT.
Malaysia’s palm oil stockpile rose, but was below expectations in Oct 18. According to the latest MPOB data, Malaysia’spalm oil stockpile climbed further to 2.72mn tons in Oct 18 (+23.6% YoY, +7.6% MoM). Despite the uptrend, the 2.72mn tons figure missed the consensus estimate of 2.86mn tons mainly due to stronger-than-expected exports performance in Oct 18 (+2.2% YoY, -3.0% MoM).
Oct 18 output was in-line with the street’s estimate. Palm oil output reached 1.96mn tons (-2.2% YoY, +6.0% MoM) in Oct 18, in line with the street’s estimate of 1.96mn tons. Stronger growth was seen in Sabah/Sarawak (+3.2% YoY, +6.4% MoM) as compared to Peninsula Malaysia (-6.8% YoY, +5.7% MoM). The MoM increase in Oct output was in-line with seasonality. All in all, the 10M18 palm oil output reached 15.86mn tons (-1.7% YoY). We believe that Oct will be the peak production month and that output will start to trend down from Nov-Feb; hence, we think some of the pressure on CPO prices should ease.
Oct 18’s exports were better-than-expected. Palm oil exports reached 1.57mn tons (+2.2% YoY, -3.0% MoM), above consensus estimates of 1.42mn tons.In particular, exports to China were strong (+9.9% YoY, +94.2% MoM). We suspect this may owe to the ongoing trade conflict between China and the US, which led China to turn to Malaysian palm oil as a substitute for soyoil, amid attractive CPO prices. In 10M18, palm oil exports reached 13.72mn tons (-0.4% YoY).
The soyoil-CPO price spread widened further to USD131/ton at the end of Oct 18 from USD120/ton at the end of Sep 18. We believe the widening spread was mainly due to further declines in CPO prices as a result of the bumper crop.
Maintain OVERWEIGHT. We maintain our OVERWEIGHT call on the plantation sector with LSIP as our top pick. We believe that CPO prices have reached their bottom as we expect prices to pick-up as the low crop season is approaching, easing the current oversupply. In FY19, we are more positive on the CPO price outlookgiven the prospect for slower supply growth combined with stronger demand boosted by the roll-out of the B20 mandate as well as stronger CPO demand from India and China. We maintain our CPO price estimates of MYR2,300/ton and MYR2,550/ton in FY18 and FY19, respectively. The YTD CPO price averages MYR2,303/ton.