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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Mon, 17 Feb 2020, 9:56 AM

 

Plantation - Inventory Still Easing, But Not for Much Longer

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April 2019 CPO inventory eased 7% MoM to 2.73m MT, in line with expectations. A positive surprise to us was that CPO production inched down 1% MoM to 1.65m MT instead of creeping up as we had expected (+4% MoM to 1.74m MT), although it aligned with consensus forecast of 1.64m MT (-2% MoM). Meanwhile, exports edged up 2% MoM to 1.65m MT, also consistent with expectations. India took center stage with an all-time high monthly purchase of 524k MT (+53% MoM), while demand from China also mounted further to 201k MT (+17% MoM). Unfortunately, these were dampened by 13% and 40% MoM declines from the EU and Pakistan, respectively. For May 2019, we believe production will return to the growth track with 3% MoM increase to 1.70m MT, while exports are likely to improve 2% MoM to 1.68m MT on further strength of Chinese demand. All-in, we anticipate demand of 1.96m MT to outstrip supply of 1.80m MT in May 2019, leading to lower ending stocks of 2.56m MT (- 6% MoM). We are in the midst of reviewing our 2019 CPO price target of RM2,400/MT with a downward bias, as it no longer seems attainable with stockpiles likely resuming an upward track in 2H19 and CPO prices only averaging RM2,005/MT year-to-date. Maintain NEUTRAL with a possibility of downgrading to UNDERWEIGHT. The current low CPO price environment is likely to deal a great blow to planters’ earnings in 2019, with upstreamfocused planters such as HSPLANT, IJMPLNT and UMCCA possibly reporting losses. With little expectations, possible salvations for the sector include: (i) higher exports to China, (ii) slowing production in Indonesia as palms take a rest post-bumper harvest in 2018, (iii) better-than-expected biodiesel off-take given the current CPO-togasoil discount of USD168/MT (vs. 1-year average of USD129/MT), and (iv) further clarity on new biodiesel initiatives (B30 in Indonesia and B20 in Malaysia). More realistically, we believe CPO prices are likely to remain under pressure for the rest of 2019 with stockpiles burgeoning again in 2H19.

April 2019 CPO inventory eased 7% MoM to 2.73m MT, in line with consensus and our estimates of 2.77-2.78m MT (-5% MoM). A positive surprise to us was that CPO production inched down 1% MoM to 1.65m MT instead of creeping up as we had expected (+4% MoM to 1.74m MT), although it aligned with consensus forecast of 1.64m MT (-2% MoM). Meanwhile, exports edged up 2% MoM to 1.65m MT, consistent with consensus and our estimates of 1.64-1.66m MT (+2% MoM). India took center stage with an all-time high monthly purchase of 524k MT (+53% MoM), as the locals possibly continued to take advantage of the reduction in import levy from 44% to 40% in January 2019 as well as low CPO prices currently. For China, demand also mounted further to 201k MT (+17% MoM), likely in a bid to fulfill its pledge to bump up palm oil purchase from Malaysia by 50%. Unfortunately, these were dampened by 13% and 40% MoM declines from the EU and Pakistan, respectively.

May 2019 production to inch up 3% MoM to 1.70m MT. Production has likely reached the low in February and started inching up again in March, while the slight dip in April was likely just a pause. We believe production should from hereon continue edging up at a gradual pace through June, before a strong seasonal pick-up typically in July-September. As such, we forecast May 2019 CPO output to inch up 3% MoM to 1.70m MT, in line with the 3-year average pace of increase for the month of May.

Exports to improve further by 2% MoM to 1.68m MT in May 2019. We expect demand from China to continue picking up given the pledge to increase its palm oil purchase from Malaysia by 50%, while exports to the EU region should also remain stable given the recent recovery in crude oil prices, which makes CPO more attractive as feedstock for biofuels. On the other hand, exports to India could see some retracements from a high base as the buying frenzy arising from lower import tax dissipates. Overall, we still foresee exports volume to improve further by 2% MoM to 1.68m MT in May 2019.

May 2019 stocks to ease by 6% MoM to 2.56m MT. All-in, we anticipate demand of 1.96m MT to outstrip supply of 1.80m MT in May 2019, leading to lower ending stocks of 2.56m MT (-6% MoM). We are in the midst of reviewing our 2019 CPO price target of RM2,400/MT with a downward bias, as it no longer seems attainable with stockpiles likely resuming an upward track in 2H19 and CPO prices only averaging RM2,005/MT year-to-date.

Maintain NEUTRAL with a possibility of downgrading to UNDERWEIGHT. The current low CPO price environment is likely to deal a great blow to planters’ earnings in 2019, with upstream-focused planters such as HSPLANT, IJMPLNT and UMCCA possibly reporting losses. With little expectation, possible salvations of the sector include: (i) higher exports to China, (ii) slowing production in Indonesia as palms take a rest post-bumper harvest in 2018, (iii) better-than-expected biodiesel off-take given the current CPO-to-gasoil discount of USD168/MT (vs. 1-year average of USD129/MT), and (iv) further clarity on new biodiesel initiatives (B30 in Indonesia and B20 in Malaysia). More realistically, we believe CPO prices are likely to remain under pressure for the rest of 2019 with stockpiles burgeoning again in 2H19.

Source: Kenanga Research - 13 May 2019

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