• Inventory eased 4.1% mom to 2.26m tonnes

• CPO production declined 14.4% mom to 1.54m tonnes

• Palm oil exports declined 14.6% mom to 1.40m tonnes.

• Average CPO price forecast for 2020 of RM2,380/MT maintained.

• Maintain Neutral on the sector.

Closing stocks for November eased to 2.26m tonnes

Inventory in November reduced 4.1% mom to 2.256m tonnes as production dropped 14% mom to 1.54m tonnes compounded by the decline in PO import of 74.7k tonnes (-12% mom and -44% yoy). Notably, stocks of CPO decreased by 12.8% mom (-35.5% yoy) to 1.15m tonnes during the period – with all states recorded lower stockpiles. However, PPO (processed PO), increased 7.1% mom to 1.10m tonnes (-9.4% yoy) from 1.03m tonnes recorded in Oct19.

Export dropped 14.6% mom to 1.40m tonnes

Palm oil export volume slipped 14.6% mom to 1.401m tonnes in Nov 2019 as major importing countries like India, EU, Vietnam, Japan and Singapore reduced their intake of PO. As expected India lowered their import of PO by 35.1% (Table 3) to 142.7m tonnes, believed to be due to India’s refiners’ wait-and-see approach on possibility of Indian government action to retaliate following Malaysian PM’s criticism of India over Kashmir issue. On the other hand, demand from China continued to be strong, which increased 24% mom to 340.2m tonnes, followed by Pakistan (12% mom) and Iran (34% mom).

Production dropped 14.4% mom to 1.54m tonnes.

Malaysia’s CPO production weakened 14.36% mom (-16.65% yoy) to 1.538m tonnes in Nov 2019 as all states registered lower production. The lower production was led by Pahang which dropped by 20.2% mom to 211k tonnes, followed by Kelantan (-18.2%), Sarawak (-17.8%), Terengganu (-12.5%) and Selangor (-11.3%). As for Jan-Nov 2019 period, CPO production surged 4.6% yoy to 18.52m tonnes. We maintain our forecast that CPO production would reach 19.99m tonnes for this year (+2.4%).

Average CPO price forecast maintained at RM2,380/MT for 2020.

The 3-month CPO futures price in the month of November traded higher, closing the month at RM2,744/MT. In-line with the derivatives market, CPO price for local delivery, i.e. MPOB’s average CPO price increased 18.5% mom to RM2,493.50/MT against RM2,104/MT recorded in the previous month. Nevertheless, for Jan-Nov 2019 period, the MPOB average CPO price was down by RM219/MT or -9.6% to RM2,056/MT against RM2,275/MT recorded in the same period last year; but 0.3% above our 2019 average CPO price forecast of RM2,050/MT.

We are predicting that CPO price for the remaining months will trade within a range of RM2,600/MT and RM2,800/MT; taking cue from the current bullish crude palm oil’s price outlook that is supported by positive sentiment, i.e. 1) higher biodiesel take-off, 2) lower FFB production from Malaysia and Indonesia, and 3) rally in soybean oil prices - tighter supply of soybean oil due to lower soybean crushing outlook. Nonetheless, we retain our average CPO price forecast for 2020 at RM2,380/MT.

Risk factors would include 1) lower-than-expected demand due to changes in government policies of importing countries and 2) weakening of crude oil prices

Maintain “Neutral”

Maintain Neutral on the sector with likely scenario that a higher ASP of PO is insufficient to compensate for the expected weak production and higher costs – which would continue to be a risk to planters’ earnings. We have Hold recommendation on KLK (TP: RM23.80), HAPL (TP: RM1.44), TSH (TP: RM1.11), GENP (TP: RM10.33), SOP (TP: RM2.98), FGV (TP: RM1.23), Sarawak Plant (TP: RM1.65) and SDPL (TP: RM5.00); with Buy on IOI (TP: RM5.00) and a nonrated for TH Plant.

Source: BIMB Securities Research - 11 Dec 2019