Investment Highlights

• The Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for May 2019. For the third consecutive month, palm inventory in Malaysia declined. The 10.3% MoM fall in palm stockpiles in May can be attributed mainly to the 3.5% increase in exports and 21.9% jump in domestic disappearance. These more than compensated for a small 1.3% MoM rise in Malaysia’s CPO production in May. Domestic disappearance of palm oil amounted to 313,958 tonnes in May against 257,622 tonnes in April. We think that the MoM surge in domestic disappearance in May is due to stockpiling for the B7 biodiesel policy, which will be implemented in the industrial sector in July 2019.
• Malaysia’s palm inventory of 2.45mil tonnes in May (April: 2.73mil tonnes) was in line with consensus estimates of 2.46mil tonnes. Malaysia’s highest level of palm stockpiles was 3.22mil tonnes, which was recorded in December 2018. From the peak of 3.22mil tonnes, palm inventory in Malaysia has contracted by 23.9% as production eased.

• We affirm our view that Malaysia’s palm inventory would rise from July onwards as palm productionrecovers after the Hari Raya lull. Also, CPO output is expected to expand ahead of the peak output period in 2H2019. We think that Malaysia would achieve its highest level of CPO production in October or November 2019. Oil World has forecast Malaysia’s CPO production to inch up by 3.0% to 20.1mil tonnes in 2019F from 19.52mil tonnes in 2018.

• Malaysia’s CPO production improved by 9.1% YoY in 5M2019. Comparing May against April, CPO output in Sabahslid by 0.6% but in Peninsular Malaysia, CPO production inched up by 1.2%. CPO output in Sarawak rose by a stronger 4.4% MoM to 323,788 tonnes in May. We believe that Malaysia’s CPO output in June would be lower than May as estate workers usually take a two-week break for the Hari Raya festivities.

• Palm imports surged by 80.1% YoY to 496,656 tonnes in 5M2019 from 275,787 tonnes in 5M2018. On a monthly basis however, Malaysia’s palm imports rose by 4.5% to 72,110 tonnes in May. We think that imports of palm products from Indonesia have been rising as CPO prices in Indonesia are cheaper. We believe that CPO price in Indonesia is lower than Malaysia by RM200/tonne to RM300/tonne.

• Malaysia’s palm exports grew by 10.7% YoY to 7.99mil tonnes in 5M2019 driven mainly by China and India. Palm exports to China improved by 26.6% YoY to 899,375 tonnes in 5M2019 on the back of low CPO prices and a switch from soybean due to the trade war with the US. Palm exports to India surged by 75.8% YoY to 2.16mil tonnes in 5M2019 underpinned by strong demand from the food segment and lower import tariffs resulting from a trade agreement with India.

• We have an UNDERWEIGHT stance on the plantation sector for 2H2019. We believe that CPO prices would continue to be weak. There is risk that inventories would rise again underpinned by a pick-up in CPO production in 2H2019. We have an average CPO price assumption of RM2,100/tonne for Malaysia in 2019F (2018: RM2,235/tonne).

Source: AmInvest Research - 13 Jun 2019