• IPI shrank 2.2% yoy in November
• Declined in IPI for November dragged by the mining and electricity index
• Manufacturing output registered slower growth
• Manufacturing sales increased in November
• Productivity slowed to 4.5% yoy in November
• Global industrial production weakened amid resurgence of COVID-19 cases
• Production will be affected by more stringent MCOs

IPI shrank 2.2% yoy in November

Industrial production (IPI) shrank 2.2% yoy in November following a 0.5% decline a month earlier. This was the second straight month of decline in industrial output, and the steepest fall since May, amid the coronavirus pandemic. Production of mining shrank faster and electricity output fell.

On monthly basis, the IPI in November decreased 1.7%. Based on month-on-month comparison, the declined in IPI for November was due to the reductions in all subindices; mining (-0.7%), electricity (-6.0%) and manufacturing (-3.0%). In a seasonally adjusted terms, IPI in November showed a downturn of 1.0%. The decrease was due to the decline in all indices; electricity index (-2.5%), mining index (-2.2%) and manufacturing index (-0.2%).

The IPI in the period January to November 2020 recorded a decline of 4.8% cent as compared to the same period of the previous year. This decrease was due to the reduction in all indices; mining index (-10.1%), electricity index (-4.0%) and manufacturing index (-3.3%).

Source: BIMB Securities Research - 12 Jan 2021

• Unemployment rate edged up to 5-month high of 4.8% in November
• The number of unemployed persons increased by 16.2k to 764.4k in November
• Total labor force changed a little with additional 5.2k persons to 15.96 million
• Labor force participation rate down slightly to 68.4%
• Jobless rate expected to remain high until mid-2021

Employed persons dropped 0.1% mom or 11.0k persons to 15.20m persons in November 2020 after recording an upward trend for five consecutive months. Yearon-year comparison, the indicator continued with a decreasing trend for eight consecutive months whereby the number of employed persons declined 0.8% during the month. In line with this, the employment-to-population ratio which indicates the ability of an economy to create employment shrank by 0.2 percentage point to 65.1%. Year-on-year, the employment-to-population ratio dropped by 1.5 percentage points from 66.6%.

The unemployment rate increased slightly by 0.1 percentage point (ppt) to 4.8% in November as compared to the previous month. The number of unemployed persons rose by 2.2% or 16.2k persons to record 764.4k unemployed persons. The unemployment rate for November was higher by 1.6 ppt year-on-year, with the number of unemployed persons registering an additional of 250.5k persons.

The labour force participation rate (LFPR) dropped marginally by 0.1 ppt to 68.4%. However, the number of labour force changed little over the month with additional of 5.2k persons to record 15.96m persons. Year-on-year comparison, the number of labour force improved by 131.6k persons (Nov’19: 15.83m persons). In the meantime, the LFPR edged down by 0.4 ppt (Nov’19: 68.8%).

Source: BIMB Securities Research - 12 Jan 2021

• Inventory eased 19.0% mom to 1.26m tonnes in December
• CPO production contracted 10.6% mom to 1.33m tonnes.
• Palm oil exports improved 24.7% mom to 1.62m tonnes.
• Maintain Neutral on the sector with target average CPO price of RM2,950/MT for 2021 and RM2,700/MT for 2022.

Closing stocks improved 19% mom to 1.26m tonnes in December

Unexpectedly inventory in December 2020 dropped significantly to 1.26m tonnes vs. 1.56m tonnes in Nov (-19.0% mom; -37.1% yoy) – the lowest recorded in seventeen years (Dec’03: 1.17m tonnes). This is supported by higher export and lower production registered during the month - although import is higher, recorded at 282k against 113k tonnes registered in Nov’20 (+150% mom and +129% yoy). The decline in inventory reflects the 19.2% and 18.8% drop in CPO and PPO (processed palm oil) stocksto 583.8k tonnes and 681.1k tonnes respectively during the period. We predict that stocks level would continue to be lower at the region of 1.25m tonnes to 1.45m tonnes up until Feb’21 as production is expected to continue to be weak and exports remain encouraging to cater demand for festivities.

Export surged 24.7% mom to 1.62m tonnes

Palm oil export volume increased 24.66% mom to 1.625m tonnes in Dec as oppose to 1.303m tonnes in Nov 2020 as major importing countries like India, USA, Iran, South Korea and Philippines increased their PO intake – believe to take advantage of zero export tax impose by Malaysia before its start to kick-in in Jan 2021.

As for Jan-Dec’20 period, demand declined by 5.96% yoy to 17.369m tonnes against 18.469m tonnes registered in the same period last year. Conversely, exports value of palm oil and palm oil products for Jan-Dec 2020 period increased 43% yoy to RM72.77m as compared to RM63.69m registered in the same period last year – in view of higher palm products price achieved in 2020.

Production declined 10.59% mom to 1.33m tonnes.

Malaysia’s CPO production decreased 10.59% mom (-0.02% yoy) to 1.334m tonnes in Dec 2020 vs. 1.492m tonnes in Nov 2020. Mostly all states in Malaysia recorded mom lower in CPO production, except for Kedah and Perak which both increased 4.9% mom to 10.7k tonnes and 124k tonnes respectively. As for Jan-Dec 2020 period, CPO production dropped 3.63% yoy to 19.137m tonnes due to lower FFB and lower quality OER processed. We are of the view that lower OER and FFB yield would continue to shadow the CPO production in the next couple of months as productivity is wedged by the lag impact of weaker yield from the dry weather experienced in 2019 and lower fertilizer application in 2018/19, coupled with localise flooded in palm production states i.e., Pahang and Johor.

Maintain 2021 average CPO price forecast at RM2,950/MT

The BMD’s 3-month CPO futures price for the month of December was bullish, closing the month at RM3,600/MT (+8.93% mom) - in line with the rally in Soybean oil prices. The average CPO price for local delivery increased 6.5% mom to an average of RM3,620.50/MT against RM3,422/MT recorded in the previous month (Dec’19: RM2,813/MT); as demand prospect encouraging and a hiccup in PO production due to labour shortage, weaker yield and La-Nina impact intensify. As for Jan-Dec 2020 period, the MPOB average CPO price of RM2,685.50/MT was higher by RM606.50/MT or 29.2% against RM2,079/MT recorded in the same period last year.

We are predicting that CPO price for the first-quarter of 2021 to trade within a range of RM4,000/MT and RM3,500/MT; taking cue from the current bullish crude palm oil’s price outlook that is supported by positive sentiment, i.e., 1) rally in soybean oil prices - tight supply of vegetable oil especially Soybean in Argentina and Brazil whilst Sunflower and rapeseed in black sea region, 2) lower FFB production from Malaysia – apart from lower yield, production is expected to be lower as harvesting is believe to be badly interrupted by flooded in localise palm plantation states i.e., Pahang and Johor, and 3) demand is expected to continue to be encouraging, supported by demand for festivities.

We believe the possible negative factors for CPO price are 1) slower economic growth and consumption of edible oils, 2) lower-than-expected demand due to changes in government policies of importing countries, 3) higher-than-expected supply and stockpiles of Soybean and SBO, 4) narrowing of the price differential between CPO and SBO, 5) weakening of crude oil prices, and 6) prolong Covid-19 pandemic and movement restriction.

Maintain “Neutral”

Maintain Neutral call on plantation sector as valuations, in our view, will moderate following the anticipated setback in palm products price towards the end of the second-half of 2021. The high operational costs and suppressed profit margin on lower-than-expected production might be the hiccup for earnings moving ahead coupled with continuous challenges and obstacle face by the industry. Nevertheless, we foresee that upstream players' current low PER implies that market has not fully accorded the growth to be generated by these company on account of higher palm oil product prices anticipated in 2020/21. As such, we have BUY call on TSH (RM1.23), SOP (RM4.50), Sarawak Plant (RM2.50) and HAPL (TP: RM2.07), whilst HOLD recommendation on KLK (RM23.10), IOI (RM4.80), GENP (TP: RM10.00), FGV (TP: RM1.17) and SDPL (TP: RM5.40); and non-rated for TH Plant.

Source: BIMB Securities Research - 12 Jan 2021

• Foreign holdings of MYR debts securities increased to RM223.0bn
• Foreigners bought RM2.3bn of MGS and RM1.4bn of GII
• Total portfolio inflow of RM2.9bn for equities and debt securities combined
• Malaysia still provides attractive real yields

Foreign portfolio inflows persisted in December as foreigners continued to snap up Malaysian debt securities by RM3.5bn (Nov: +RM1.9bn; Oct: +RM8.0bn). This marks the eighth month of net foreign inflows entering domestic bonds which helped to offset continued net foreign outflows from Malaysian equities. Foreign inflows primarily entered Malaysian government securities that lifted foreign holdings of MGS and GII by RM3.7bn to a 4-year high of RM202.1bn of total outstanding in December (Oct 2016: RM214.9bn).

Looking into details, foreigners bought mainly Malaysian Government Securities (MGS) totalling RM2.3bn (Nov: +RM1.8bn; Oct: +RM4.0bn), and Government Investment Issues (GII) of RM1.4bn (Nov: +RM0.8bn; Oct: +RM2.4bn). For MGS alone, foreign holdings rose to RMR177.3bn or 40.6% of total MGS outstanding (Nov: 40.1%; Oct: 40.3%). Foreign holdings of GII increased to RM24.8bn or 6.6% of total GII outstanding (Nov: 6.3%; Oct: 6.1%). Correspondingly, foreign holdings of government bonds (MGS & GII) rose by RM3.7bn to RM202.1bn or 24.9% of total outstanding (Nov: 24.6%; Oct: 24.5%).

As at end-December, foreign investors bought RM3.5bn of Malaysian bonds (Nov: +RM1.9bn; Oct: +RM8.0bn; Sep: +RM0.5bn; Aug: +RM3.0bn). Meanwhile, foreign net selling of Malaysia equities decelerated to RM0.6bn in December, compared to RM1.0bn in November; this represents their 17th consecutive month of net sell (since Aug 2019). As a result, there was net inflows of RM2.9bn for equities and debt securities combined (Nov: +RM0.9bn; Oct: +7.3bn) in December. For the full year of 2020, foreign portfolio flows returned to outflow of RM6.5bn (2019: +RM8.8bn; 2018: -RM33.6bn). Strong foreign purchases of Malaysian debt securities (2020: +RM18.2bn; 2019: +RM19.9bn; 2018: -RM22.0bn) was the sole contributor to overall foreign portfolio inflows last year, which was not enough to offset foreign outflows from the Malaysian equity market (2020: -RM24.7bn; 2019: -RM11.1bn; 2018: - RM11.9bn).

Source: BIMB Securities Research - 11 Jan 2021

• US loses 140,000 jobs in December
• Unemployment rate unchanged at 6.7%
• Wage growth increased 0.8% mom and 5.1% yoy
• Labor force participation rate unchanged at 61.5%
• COVID is still holding sway over the job growth

The US lost jobs in December for the first time in eight months as the coronavirus bore down on the economy again and forced businesses to resort to more layoffs. US nonfarm payrolls (NFP) fell by 140k in December. The decline in employment was the first since last April, when the US lost a gargantuan 20.8 million jobs in that one month alone. The unemployment rate remained unchanged from November at 6.7%.

The decline in payroll employment reflects the recent increase in COVID-19 cases and efforts to contain the pandemic. In December, job losses in leisure and hospitality and in private education were partially offset by gains in professional and business services, retail trade, and construction. The biggest losses were in the leisure and hospitality (-498k), concentrated in bars and restaurants (-372k). Employment in the sector remains 23% lower than February levels. Jobs were also shed within private education (-63k), government (-45k) and other services (-22k), which includes businesses like hair salons. Many sectors continued to add jobs. Professional and business services increased by 161k, retail trade by 121k, construction by 51k, transportation and warehousing by 47k, and manufacturing by 38k.

The change in total nonfarm payroll employment for October was revised up by 44k from +610k to +654k and the change for November was revised up by 91k, from +245k to +336k. With these revisions, employment in October and November combined was 135k more than previously reported.

In December, both the unemployment rate, at 6.7%, and the number of unemployed persons, at 10.7m, were unchanged. The labor force participation rate also unchanged at 61.5%. The average hourly earnings ticked up 0.8% mom and 5.1% yoy in December.

Source: BIMB Securities Research - 11 Jan 2021

• Possible lower-for-longer oil price scenario prompted Petronas to delay marginal field development. Nonetheless, the outlook for mid-to-large sized field development remains constructive as oil stabilizes above USD40/bbl, in our view. We forecast Brent to trade at an average of USD45/bbl in 2021.

• We are optimistic with recovery in offshore projects as we expect Petronas to allocate more capital towards upstream segment following completion of its downstream project.

• We upgrade our sector recommendation on upstream to OVERWEIGHT (from NEUTRAL) as we foresee a recovery in offshore development projects in near future. At current price, we believe the upside potential outweighs the risk.

Resumption in new offshore development projects

Despite pessimism over Petronas’ capex cut, we believe the worst is over for Malaysia’s upstream segment as we think under-investment in prior years will ensure a steady number of projects maturing within next 3 years. In addition, we believe Petronas’ effort in high-grading its development strategy to favour mid-tolarge sized fields will reduce the possibility of further delay in new field development projects. Despite higher dividend payment to government, we think the completion of Petronas’ downstream project (i.e. Pengerang Integrated Complex) which is worth c.RM100bn will lead to higher allocation towards upstream projects.

Riding on recovery theme

Overall, there are 11 projects now under execution and 19 new projects already approved to be sanctioned over the next 3 years. On top of that, there are also 25 projects that are at pre-FID stage currently. We believe this should continue to support revenue visibility for fabricators in the medium term. Meanwhile, Petronas projects that it would require 7-10 jack-up rig (JUR) annually over the next 3 years, which is close to 5-year average (8.5 units), based on our estimate. This is higher than typical downcycle demand level, as higher demand for development well drilling is required currently (after the completion of HUC activity) before first oil/gas to be produced. Furthermore, 8 out of 11 on-going projects are expected to be completed this year which should also support jack-up rig utilisation. As such, we think both fabricators (MMHE) and jack-up rig operator (Velesto) are on track to see recovery in business activities and revenue for FY21 and FY22.

Change in earnings forecast

With expectation of stable demand for JUR, we raised Velesto’s FY21/22F utilisation rate assumption to 70%/67% (from 60%/60%) which brings us to reduce our earlier net loss forecast by 53%/60% respectively.

OVERWEIGHT on Upstream services

We upgrade our sector recommendation on upstream to OVERWEIGHT from NEUTRAL. We upgrade Velesto to BUY (from HOLD) with higher TP of RM0.265 on steady demand for jack-up rig in next 3 years. We also maintain our BUY call on MMHE with higher TP to RM0.77 given the recovery path in offshore projects.

Source: BIMB Securities Research - 7 Jan 2021