|Pic Credits : wsj.com|
CIMB Futures team’s survey of 20 planters suggests that Malaysian palm oil output grew 2.6% mom and 7.4% higher yoy at 1.81m tonnes in Jul 15. Palm oil exports were weak, falling by 6-9% mom in Jul 15, according to cargo surveyors ITS and SGS. Overall, we estimate that palm oil stocks may have increased by 4% mom (+33% yoy) to 2.27m tonnes as at end-Jul 15. We are negative on the higher palm oil stock level, which suggests that there is a good buffer against any near-term shortfall in supply. We maintain our Neutral sector rating, with a preference for First Resources and Genting Plantations.
A survey of 20 Malaysian planters by the CIMB Futures team suggests that CPO production in Jul 15 was 2.6% higher mom and 7% yoy at 1.81m tonnes. The rise in output compared to a year ago was due to improving FFB yields as estates recovered from biological tree stress, flooding in late-2014 and drought in early 2014. The survey indicates that Sarawak estates posted the strongest jump in output of around 10% mom. Peninsular Malaysia posted a 4% mom increase in output. Sabah estates were the weakest performer, registering a 7% decline in output, possibly due to the lower rainfall in the state. Malaysia palm oil exports fell by 6-9% mom based on cargo surveyors, Intertek and SGS estimates. This was due mainly to weaker demand from India and the EU.
We have assumed domestic consumption of 262,000 tonnes (the six-month average) and flattish mom imports for Jul 2015. Based on these assumptions, we estimate that Malaysian palm oil inventories could rise by 4% mom and 33% yoy to 2.4m tonnes as at end-Jul 15. The variance between our survey and the actual MPOB stock figures since we started producing the monthly stock preview in Aug 14 has been 0-9%. The official figures will be released by MPOB next Monday, 10 Aug 2015.
What We Think
The main takeaway from our survey is that Malaysian palm oil output was higher mom in Jul, which is a surprise to us as we had expected production to ease as workers took time out to celebrate the Ramadan festival. In the past, productivity in the estates typically drops slightly during this period but resume its uptrend after the festive period. The exports were weaker than expected, falling by 6-9% mom, which we believe could be the absence of festival demand and buyers deferring purchases due to concerns over rising stocks as palm oil trees enter their peak production season. Overall, palm oil stocks in Malaysia could rise by 4% mom as at end-Jul which is bearish for CPO prices.
What You Should Do
We also expect plantation companies to report weaker earnings on a yoy basis in the upcoming results season due to lower CPO prices. We advise investors to be selective and we like First Resources and Genting Plantations for long-term growth. (Read Report)
Source : CIMB Research