Danareksa Equity Snapshot – Plantation Sector (OVERWEIGHT)

Yudha Gautama

Malaysia’s palm oil inventory jumped to a record high of 3.01mn tons in Nov 18 (+17.7% YoY, +10.5% MoM), higher than the street’s estimate of 2.99mn tons, as weak exports prevailed over the decline in output. Going forward, we think CPO prices will get near-term support from the low crop season and roll-out of B10, while Indonesia’s decision to waive the CPO export levy may put Malaysia’s exports at a disadvantage. However, we remain upbeat on the FY19 CPO price outlook on slower output growth and the expected demand boost from the B20 program. Maintain OVERWEIGHT.

Malaysia’s palm oil inventory rose to a record high in Nov 18. According to the latest data released by MPOB, Malaysia’s palm oil inventory rose to a record high of 3.01mn tons in Nov 18 (+17.7% YoY, +10.5% MoM). The 3.01mn tons figure is higher than the consensus estimate of 2.99mn tons, mainly due to November’s weaker-than-expected exports performance (+1.4% YoY, -12.9% MoM), despite the decline in production (-5.0% YoY, -6.1% MoM).

Nov 18 output was lower than consensus estimates. Palm oil output was reported at 1.85mn tons in Nov 18 (-5.0% YoY, -6.1% MoM), below the consensus estimate of 1.94mn tons, although we think it is in-line with the seasonality trend. Both Peninsula Malaysia and Sabah/Sarawak posted output declines of -8.7% YoY/-5.6% MoM and -0.8% YoY/-6.6% MoM, respectively. As of 11M18, palm oil output stood at 17.71mn tons (-2.1% YoY). We believe output will remain in a declining trend in conjunction with the low crop cycle until Feb, which should provide support to the CPO price.

Nov 18 exports lagged behind. Palm oil exports were recorded at 1.38mn tons (+1.4% YoY, -12.9% MoM), missing the street’s estimate of 1.46mn tons. The sluggish exports were affected by weak demand from China (-15.1% YoY, -20.9% MoM) and the EU (-3.9% YoY, -11.4% MoM), which may reflect seasonally soft demand due to the approach of winter. Meanwhile, exports to India surged (+141.9% YoY, +143.9% MoM). As of 11M18, palm oil exports reached 15.10mn tons (-0.2% YoY). In the near-term, Malaysia’s exports may be temporarily undermined by Indonesia’s recent decision to waive the CPO export levy which benefits Indonesian planters at the expense of their Malaysian counterparts.

The soyoil-CPO price spread widened further to USD166/ton at the end of Nov 18 from USD131/ton at the end of Oct 18 (vs. the average of USD130/ton). The widening spread owes mostly to the continued decline in the CPO price as a result of persisting oversupply concerns.

Maintain OVERWEIGHT. We maintain our OVERWEIGHT call on the plantation sector with LSIP as our top pick. In the near-term, we think the CPO price will get support from the low crop season and Malaysia’s B10 implementation. However, near-term risk could arise from Indonesia’s decision to waive the CPO export levy, which may cause buyers to temporarily switch from Malaysia’s palm oil to Indonesia’s. Nevertheless, we continue to be upbeat on the CPO price outlook in FY19 given the prospect for slower supply growth combined with stronger demand, particularly boosted by the roll-out of the B20 mandate. We maintain our CPO price estimates of MYR2,300/ton and MYR2,550/ton in FY18 and FY19, respectively. The YTD CPO price averages MYR2,261/ton.

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