Investment Highlights

• Malaysia Derivatives Exchange (MDEX) CPO price for November rose above RM2,400/tonne last week and closed at RM2,422/tonne on Friday.

• Comments:

• We are unsure if the surge in CPO prices is sustainable due to the speed and magnitude of the increase. However, we are cognizant of the fact that CPO prices are usually higher in 4Q and 1Q of the calendar year as these are the low production months.

• Average MPOB physical delivery price was RM2,012/tonne in 10M2019 while average MDEX CPO price has been RM2,174/tonne year to date. Usually, there is a difference of RM100/tonne to RM150/tonne between the physical delivery and MDEX prices due to transportation and logistics costs.

• Our average CPO price assumptions are RM2,100/tonne for 2019E and RM2,200/tonne for 2020F. We believe that consensus is assuming average CPO prices of RM2,000/tonne to RM2,200/tonne for 2019E and RM2,200/tonne to RM2,500/tonne for 2020F.

• We are NEUTRAL on the plantation sector for now. However, for investors who would like exposure to the plantation sector, we would recommend Kuala Lumpur Kepong (KLK) as its PE valuation has become palatable after the decline inthe share price. We have a fair value of RM22.05/share for KLK based on a FY20F PE of 27x. KLK is currently trading at a FYE9/20F PE of 26.5x vs. IOI Corporation’s FYE6/20F PE of 28.2x and Sime Darby Plantation’s FYE12/20F PE of 40.2x.

• In roughly two weeks, spot MDEX CPO price has surged by 15.3%. MDEX spot CPO price climbed to RM2,444/tonne last Thursday from RM2,119/tonne on 14 October. The surge in CPO price came in spite of the news that India is mulling higher import taxes for refined palm oil and an advisory by the Solvent Extractors Association of India that its members shun imports of Malaysia’s palm products.

• We attribute the rise in CPO prices to the following:

1. Strong exports in October, which may result in Malaysia’s palm inventory in October being lower than September’s 2.45mil tonnes

AmSpec said that Malaysia’s palm shipments rose by 17% in the month of October compared with September. Intertek said that Malaysia’s palm shipments increased by 10.6% MoM in October while SGS said that the growth in exports was 14.6%. SGS added that Malaysia’s palm shipments to China surged by 48.1% MoM in October.

2. Rise in prices of US soybean and soybean oil

US soybean oil price for December went up by 6.6% to US$0.3075/pound last Thursday from US$0.2884/pound on 27 September as China may buy more US agricultural products pursuant to the US-China trade talks. The price discount between soybean oil and CPO is 13.5% or US$91/tonne currently vs. the averages of 24.5% in 2018 and 16.2% in the past five years. US soybean price has risen by 6.9% to US$9.16/bushel last Thursday from US$8.57/bushel on 9 September on the back of optimism over the US-China trade talks and wet weather in the US Midwest, which may affect harvesting.

3. Biodiesel policies in Indonesia and Malaysia

Indonesia is expected to implement B30 in 2020F, which may result in biodiesel consumption rising to 9.6mil KL (8.4mil tonnes) in 2020F from 6.6mil KL (5.7mil tonnes) in 2019E. The consumption of 8.4mil tonnes are about 18.5% of Oil World’s forecast of 45.4mil tonnes for Indonesia’s CPO production in 2020F. The only issue is infrastructure – whether there are enough vessels to ship both CPO and biodiesel in Indonesia and whether there would be too many biodiesel delivery points.

Recall that in 2H2018, CPO prices slumped as there was a glut of CPO in Indonesia, especially in Kalimantan. Industry palm production surged in Indonesia but at the same time, there were not enough barges or vessels to ship CPO to the refineries. The barges or vessels were used to transport biodiesel instead as Indonesia accelerated the implementation of B20 in 2H2018.

Malaysia is expected to implement B20 at the end of 2020F, according to Budget 2020. Hence, the impact may only be felt in 2021F. B20 is estimated to result in a consumption of 1.3mil tonnes in total, which are about 6.5% of Malaysia’s CPO production of 20mil tonnes in 2020F.

In terms of discretionary demand for biodiesel however, this may weaken as CPO is now more expensive than gasoil. Based on current prices, CPO price is US$18/tonne higher than gasoil price.

Source: AmInvest Research - 4 Nov 2019