This article first appeared in The Edge Financial Daily on March 14, 2018 - March 20, 2018

Plantation sector
Maintain neutral: Malaysia’s February crude palm oil (CPO) production increased by 6.7% year-on-year (y-o-y) to 1.34 million tonnes due to an improvement after the lagged effect of the El Nino phenomenon that badly affected production in 2016. However, on a month-on-month (m-o-m) basis, production was down for a fourth consecutive month, declining by 15.4% m-o-m in February, due to seasonal factors.

Palm oil exports improved in February by 18.5% y-o-y to 1.31 million tonnes, but on a m-o-m basis, exports declined by 13.3%. Selected key buyers including China, India, Pakistan and the European Union bought more of Malaysia’s palm oil products, increasing by 1.7%, 135.1%, 37.8% and 60.5% y-o-y, respectively, to 105,000 tonnes, 313,800 tonnes, 67,700 tonnes and 245,800 tonnes.

The increase in palm oil exports has resulted in inventory declining to 2.48 million tonnes. We believe that the suspension of the export tax on palm oil, effective January 2018, by the Malaysian government has helped stimulate export demand for Malaysian palm oil products and contributed to the decline in the stock level.

Average Malaysian Palm Oil Board locally delivered CPO prices in February increased marginally by RM1.50 per tonne m-o-m to RM2,488 per tonne. The 2M18 CPO average selling price (ASP) is at RM2,487.50 per tonne versus RM3,251.50 per tonne for 2M17. Our CPO ASP assumption of RM2,600 per tonne for 2018E appears to be at the higher end of the industry experts’ range of RM2,200 to RM2,700 per tonne.

We make no changes to our earnings forecasts for the plantation companies we cover. We have “buy” ratings on Jaya Tiasa, Ta Ann and Felda Global Ventures (FGV); “hold” ratings on Genting Plantations, KL Kepong, SD Plantation, IJM Plantations and Hap Seng Plantations; and “sell” ratings on IOI Corp and WTK.

For plantation-sector exposure, FGV is our top pick as we believe earnings will grow on the back of higher fresh fruit bunch and CPO production as well as better contribution from the sugar business. We like FGV as we think management is focused on improving the core business, improving operational excellence and optimising financial and human capital. — Affin Hwang Investment Bank Research, March 13