• The Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for September 2021. Palm inventory in Malaysia declined by 7.0% to 1.75mil tonnes (Bloomberg consensus: 1.866mil tonnes) as at endSeptember from 1.88mil tonnes as at end-August. Recall that palm stockpiles had surged 25.5% MoM in August on the back of strong production. The 7.0% MoM fall in palm inventory in September can be attributed to stagnant production and a 36.8% jump in exports. CPO production in Malaysia edged down by 0.4% MoM to 1.70mil tonnes in September after climbing by 11.8% in August. On the other hand, CPO exports recovered by 36.8% MoM to 1.60mil tonnes in September after plunging by 16.7% in August.

• Palm imports shrank by 20.4% to 91,636 tonnes in September from 115,084 tonnes in August. Recall that downstream companies in Malaysia had stepped up their imports of Indonesia’s palm products in August before the country’s hike in CPO export tax in September. We believe that Indonesia’s CPO export tax and levy would remain high in the coming months so that there are sufficient funds to replenish the Estate Crop Fund. The fund is used to subsidise Indonesia’s B30 biodiesel programme. Comparing 9M2021 against 9M2020, Malaysia’s palm imports climbed by 60.3% to 1.11mil tonnes as CPO price is lower in Indonesia.

• Domestic disappearance of palm oil increased by 19.0% MoM to 329,236 tonnes in September. We believe that domestic disappearance or consumption of palm oil would remain strong in the coming months as dine-in and transportation activities in the Klang Valley increase. Domestic disappearance of palm oil slid by 3.6% YoY to 2.69mil tonnes in 9M2021. This was 20.2% of the country’s CPO production of 13.3mil tonnes in 9M2021.

• CPO output slipped by 0.4% MoM to 1.70mil tonnes in September due to a 4.6% drop in production in Peninsular Malaysia. In Sabah, CPO production rose by 5.6% MoM to 427,541 tonnes in September. We think that CPO output would remain flat or lower in the coming months as the oil palm trees enter the seasonally lower period. We reckon that CPO production had probably peaked in August 2021. Looking ahead, if foreign workers are allowed to re-enter Malaysia in stages from mid-October onwards, Malaysia’s CPO production would start increasing from early 2022F. Malaysia’s CPO production fell by 8.8% YoY to 13.3mil tonnes in 9M2021 dragged by unfavourable weather conditions in 1Q and a shortage of estate workers. There were also temporary halts in harvesting and milling activities in certain areas in 9M2021 due to Covid-19 outbreaks.

• The 36.8% MoM expansion in palm exports in September can be attributed to a 21.4% rise in shipments to India and a 70.5% surge in demand from China. Going forward, we believe that India’s palm purchases would soften due to ample reserves of edible oils. India’s inventory of edible oils at the ports and pipelines stood at 1.75mil tonnes as at 1 October 2021 against 1.73mil tonnes a year ago. However, China’s palm demand may increase due to reduced soybean oil supply after the country shut down soybean crushing plants temporarily in late September. This is to conserve power consumption as the country is facing a shortage of coal supply. Comparing 9M2021 against 9M2020, Malaysia’s palm exports slid by 12.1% to 11.2mil tonnes.

• We are NEUTRAL on the plantation sector as ESG concerns are expected to affect the valuations and share price performances of plantation stocks. Our 2021E CPO price assumption is RM3,500/tonne for most of the plantation companies in our coverage. We recommend to BUY Sime Darby Plantation (SDP) (fair value: RM4.88/share) for its leverage to CPO prices, robust downstream earnings and clean balance sheet.

Source: AmInvest Research - 12 Oct 2021