Does the ASF outbreak in China impact PO demand?
China’s PO import volume rose 44% yoy to 4.6m tonnes in the first 8 months of 2019. For Jan-Aug period, Malaysia’s PO export volume to China increased 29% yoy to 1.41m tonnes from 1.09m tonnes recorded in 2018. We believe the higher demand was due to the ASF outbreak aided by lower import of soybean from US that have impacted China’s domestic soybean crushing. We forecast China’s intake for Malaysia’s PO to increase by c. 15% yoy to 2.1m tonnes in 2019, hence, maintaining our forecast for Malaysia’s export of PO to increase by 6.8% yoy to 17.6m tonnes in 2019.
What to expect in Q4 2019?
CPO price are expected to remain under pressure with limited upside seen in Q4, 2019. Weaker-than-expected demand and high production season may provide some resistance to PO price recovery as stockpiles are expected to increase from 2.25m MT in August to 2.42m in December. We anticipate that stock level to start to build up again in Oct/Nov as production growth is rose, albeit marginally at 2.4% yoy to 19.99m for 2019. We think CPO price might trade between RM2,000/MTRM2,300/MT in the near term as long as SBO price is traded in CBOT trades below 30cent USD/bushel or USD660/MT.
Underweight call on sector retained
Given the weak market sentiment on US-China trade war, slower global economy, and ample supply of edible oils, we believe CPO price for 2019 will average RM2,050/MT and RM2,200/MT for 2020. All in, we anticipate that a lower ASP of PO products would continue to be a risk to planter’s earnings. Currently, most of the companies under our coverage are fully valued and are at risk of further earnings disappointment. We have Hold on KLK (TP: RM23.80), HAPL (TP: RM1.44), TSH (TP: RM0.91), GENP (TP: RM10.33), SOP (TP: RM1.98), FGV (TP: RM0.96), Sarawak Plant (TP: RM1.65) and SDPL (TP: RM4.83); with Buy on IOI (TP: RM5.00) and a non-rated for TH Plant. Rerating catalysts would include 1) tight supply - low FFB production in Malaysia and Indonesia, 2) higher biodiesel take-off, 3) rally in soybean oil prices, and 4) higherthan expected demand
Source: BIMB Securities Research - 7 Oct 2019
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