PublicInvest Research maintains 'overweight' call on plantation sector

PETALING JAYA: PublicInvest Research has maintained its “overweight” call on the plantation sector after palm oil inventories in June rebounded close to 1.77 million metric tons (mt) following six-month drops.
“It is slightly above the consensus estimates of 1.72 mt,” its analyst Chong Hoe Leong said in a report yesterday.
Chong said the crude palm oil (CPO) price has been under pressure lately, due to a stronger ringgit and unexciting inventory outlook in the near-term, which could help regain the buying interest from major consuming countries and will drive the country’s CPO exports demand.
“We maintain our positive stance on the CPO outlook with an average CPO price forecast of RM2,500 per mt for 2016 and RM2,600 per mt for 2017,” he said.
Last month, Chong said the average CPO price fell from RM2,619 per mt to RM2,539 per mt. Year-to-date, the CPO price averaged at RM2,510 per mt, which is slightly higher than the research house’s full-year estimate of RM2,500 per mt.
“Nevertheless, CPO futures plunged to the lowest level this year at RM2,186 per mt due to a stronger ringgit and unexciting inventory outlook in the near-term.”
“We think that the CPO futures has oversold as we foresee second half CPO price could average around RM2,450 per mt,” Chong added.
Meanwhile, he said that the stock-to-usage ratio climbed from 8.9-10.4% as exports slide while production continued to recover.
Palm oil exports declined 11.7% month-on-month (m-o-m) after rising 9.3% m-o-m the previous month. Chong said improved exports to the EU and Pakistan were outpaced by weaker demand from China, India and the US.
“Nevertheless, we think that exports demand should improve in the following months as cheaper CPO prices could attract more buying interest from the major consuming countries,” he added.
Last month, Chong said the CPO production had recovered by 12.3% m-o-m to 1.53 million mt, where Peninsular Malaysia and East Malaysia rose 8.9% and 15.8%, respectively.
“We expect fresh fruit bunches production to improve gradually over the next four months. It will likely peak around September-October period,” he noted.
According to product testing company Intertek Group plc, the country’s CPO exports rose 5.2% for the first ten days of July 2016, compared with a month earlier.
Based on the MPOB reference price from June 10 to July 9, Chong said the average CPO price of RM2,468 per mt will likely see the CPO export duty reduce from 6-5% for the month of August.
On a separate note, HLIB Research has maintained its “neutral” call on the plantation sector, with projected average CPO price of RM2,400 per tonne and RM2,500 per tonne for 2016 and 2017 respectively.
“We believe inventory will inch higher in July 2016, taking cue from Jun 2016’s production figure (indicating that ‘mini peak’ has begun early and will sustain into the following month, if history repeats), and exports will likely remain weak (in the absence of seasonal demand and narrowed price spread between soybean oil and palm oil),” it said.