Malaysia’s Dec 16 palm oil inventory was higher than expected at 1.67m tonnes vs 2015’s 2.63m tonnes, but still reflected a decline of 36.8% yoy on the back of weaker production. In 2017, the market expects production to recover to 19.5m-20.0m tonnes and this will largely take place in 2H17. Average CPO price for 2017 is expected at RM2,600/tonne (2016: RM2,653) as production is likely to recover and inventory is expected to pile up in 2H17. Maintain MARKET WEIGHT.
MALAYSIA PALM OIL BOARD DATA SUMMARY
End-Dec 16 palm oil inventory level at 1.67m tonnes. Palm oil inventory came in higher than market expectations at 1.67m tonnes in Dec 16 on the back of weaker-than- expected exports despite CPO production declining by a smaller 6.4% mom vs consensus forecast of -8.2% to -9.5% mom. Inventory level dropped 36.8% yoy, mainly due to weak production (-13.2% yoy) and weak palm oil imports (-45.0% yoy).
Malaysia’s CPO production for 2016 within our expectation. CPO production of 17.3m tonnes (-13.2% yoy) in 2016 was within our and market expectations of 17.0m-17.5m tonnes. CPO production is likely to stay weak in 1Q17 as it is a seasonally weak production period and the lagged impact from the drought has not tapered off yet. Thus, inventory is likely to stay low in the near term and this will support CPO prices. We expect Malaysia’s CPO production to pick up strongly in 2H17 on a yield recovery. The market is expecting Malaysia’s CPO production at 19m-20m tonnes for 2017.
GENP likely to have been a beneficiary of the CPO price uptrend in 4Q16. Although 4Q16 saw across-the-board qoq production declines, we expect this would have been offset by the 13.0% qoq increase in CPO prices. This suggests that upstream players which are more involved in spot sales and registered smaller production declines are likely to report better qoq earnings for 4Q16. Within our coverage, we note Genting Plantations (GENP) and Sarawak Oil Palms (SOP) reported CPO prices which were tracking closer to Malaysian Palm Oil Board’s (MPOB) spot prices. This could have been due to most of GENP’s and SOP’s sales being spot sales. Of these two, GENP is likely to benefit from CPO prices rally as its 4Q16 FFB production was up 21.4% qoq, while SOP is likely to register lower qoq production.
Maintain MARKET WEIGHT. Among Malaysia small- to mid-caps, we like Kim Loong (KIML/BUY/Target: RM4.20) as its earnings growth is supported by: a) recovery in FFB production, b) good milling margins from recovery of its oil extraction rate, and c) extra income from value-add by-products. Kim Loong had recently announced a special DPS of 5 sen and this lifted its FY18 DPS outlook. We are assuming similar payout ratio of 75% for FY18, translating to dividend yield of 7%.
Production increased yoy after 11 months of decline. In Dec 16, CPO production dropped 6.4% mom, but registered its first yoy increase after 11 consecutive months of decline. The weaker production mom was mainly due to a seasonally low production period and harvesting activities being affected by rainfall. The yoy increase was supported by the recovery of FFB yield, where Peninsular Malaysia and Sarawak production increased 15.1% yoy and 7.0% yoy respectively in Dec 16. However, Sabah’s production still down mom and yoy mainly due the lagged impact from the two consecutive years of severe drought.
National FFB yield is stabilising. Malaysia’s FFB yield of 1.36 tonnes/ha was above the lower end of the five-year range of 1.35 tonnes/ha (refer RHS chart) in Dec 16. Peninsular Malaysia’s FFB yield improved yoy to 1.38 tonne/ha in Dec 16 (+9.5% yoy), an indication of stabilising yields. However, Sabah’s/Sarawak’s FFB yields were still lower yoy and below the five-year range of 1.34 tonnes/ha. For 2016, Malaysia’s FFB yield declined to 15.91 tonnes/ha from 18.48 tonnes/ha in 2015. All in all, we expect FFB yield to stay low in 1H17 and normalise in 2H17.
Exports were down yoy in 2016, mainly due to weaker exports to all key importing countries except Pakistan. India and China recorded the largest yoy decline in imports, down 23.5% and 20.9% in 2016. In Dec 16, exports to China decreased 27.0% mom, likely due to weak demand during the winter season. On the other hand, exports to India were up 25.4% mom on stock replenishment.
Average CPO price for 2016 beat our expectation. Average CPO price increased 23.2% yoy to RM2,653/tonne in 2016, above our expectation of RM2,500/tonne. We reckon CPO prices are likely to stay high at RM2,800-3,300/tonne in 1Q17, supported by low inventory level and stable demand. Nevertheless, CPO prices are likely to trend down in 2H17 when production picks up. All in all, we are expecting CPO price to average at RM2,600/tonne for 2017. Although we reckon 2017’s average CPO price could come in higher than our expectation of RM2,600/tonne, we would like to keep to our assumption at this point, given that commodity prices are very volatile.
Timeline to implement B10 programme. We gather the B10 programme is ready to be put into action and the key issue that caused the recent delay in B10 implementation was the huge price differential between crude oil prices and palm oil prices. During a sharp recovery in production which we expect would come in late-3Q17, the B10 programme would prevent a sharp decline in CPO prices.
Weather disruption. Agricultural production is impacted by extreme weather. Any negative impact from the weather would be positive to prices.
We maintain our CPO price expectations of RM2,600/tonne for 2017 and RM2,500/tonne for 2018.
Backtracking of biodiesel mandates in Indonesia and Malaysia.
source: UOBKayHian 11/1/2017