Maintain marketweight: Crude palm oil (CPO) production registered a negative growth of 2.1% month-on-month (m-o-m) (1.525 million tonnes against 1.558 million tonnes) and +7.8% year-on-year (y-o-y) as compared with last year’s May production. Notably, it has halted its 10-month y-o-y positive growth streak. As such, we believe the current production level has recovered and is back to the pre-El Nino level. Moving forward, we expect production to deliver growth in June.
Exports of palm oil decreased 15.7% m-o-m and 14.3% y-o-y to 1.29 million tonnes in May given a nosedive in export to India (-75% m-o-m to 75,269 tonnes). We believe the unfavourable performance was partly due to the high import tax imposed by India. Nevertheless, the negative export growth was mitigated by exports to China (+42% m-o-m to 193,137 tonnes), Pakistan (-1% m-o-m to 128,701 tonnes) and Turkey (+124% m-o-m to 98,026 tonnes), in which these nations were the top three destinations of our exports and comprised 32.5% of our total exports in May. Moving forward, we expect export growth to pick up slightly in view of the low base in May.
Palm oil closing stock was down 0.5% m-o-m to 2.170 million tonnes but increased 39.4% y-o-y against 1.55 million tonnes in May 2017. Meanwhile, the stock-to-usage ratio rose to 1.87 times from 1.54 times m-o-m, no thanks to the poor exports in May. Looking ahead, we expect inventory to continue trending down, albeit at a slower pace, in view of the pickup in export growth which outweighs production growth.
We believe the soft CPO price in May was due to lower exports and in line with the weak soybean price in the Chicago Board of Trading. Nevertheless, our 2018 full-year average CPO price forecast remains at RM2,560 per tonne amid bearish factors such as the strong ringgit, high inventory and hike in import duties in India. Overall, we believe the CPO price will continue tracking the inventory level, which is currently trending down.
Overall, we maintain our neutral view on the sector as we expect a flattish fresh fruit bunch production growth and softening CPO price amid a hefty inventory. Meanwhile, the long-standing challenge of shortage of labour continues to weigh on performance in the plantation sector, putting pressure on planters’ operating costs.
For stocks under our coverage, we retain “buy” calls on Kim Loong Resources (target price [TP]: RM1.52) and Genting Plantations (TP: RM10.82). Our top pick for the sector is Kim Loong Resources given its prudent management, judging from the consistent earnings performance posted by the group for the past few years as well as its generosity in rewarding shareholders. Also, we are sanguine about Genting Plantations’ prospects as it is able to attain operational efficiency.
We maintain “hold” calls on Kuala Lumpur Kepong (TP: RM25.67), IOI Corp (TP: RM4.57) and IJM Plantations (TP: RM2.50) due to their rich valuations. — JF Apex Securities, June 12