• Inventory eased 11.0% mom to 2.01m tonnes

• CPO production dropped 13.3% mom to 1.33m tonnes

• Palm oil exports declined slightly by 0.67% mom to 1.40m tonnes.

• Average CPO price forecast for 2020 of RM2,480/MT maintained.

• Maintain Neutral on the sector.

Closing stocks end-2019 at 2.01m tonnes

Inventory in December 2019 fell by 10.99% mom to 2.007m tonnes (-38% yoy); the lowest since September 2017. The decline in inventory reflects the lower production and export recorded during the period. Breaking down the inventory level, both stocks from CPO and PPO (processed PO) decreased 11.6% mom (-47.5% yoy) and 10.4% mom (-22.6% yoy) respectively to 1.02m tonnes and 987.6k tonnes – with all states recorded lower stockpiles. We expect stock level to continue to be at this current level of 1.9m-2.0m tonnes in the next couple of months as production weaken (seasonal factor) whilst demand is expected to be supportive due to festivities before gradually decreasing in May-Dec 2020.

Export dropped slightly to 1.40m tonnes

Palm oil export volume dropped slightly by 0.67% mom to 1.396m tonnes in Dec 2019 as major importing countries like India, China, EU, Pakistan and Vietnam reduced their intake of PO. In short-to-medium term, we are cautious on India demand for Malaysia PO, given Indian government’s action to retaliate following Malaysian PM’s criticism of India over Kashmir issue.

Although the restriction of buying Malaysia’s refined PO is hurting our refiners, Malaysia can still export CPO to India as there is no import’s restriction on CPO. Given the tight supply situation of PO this year, we believe this will be a matter of time for Malaysia to regain market share from India as PO has price competitiveness against other vegetable oils. On the other hand, demand from China is expected to continue to be strong, thanks to US-China trade war and swine fever outbreaks that had impacted China’s domestic soybean crushing.

Production dropped 13.3% mom to 1.33m tonnes.

Malaysia’s CPO production weakened 13.27% mom (-26.22% yoy) to 1.334m tonnes in Dec 2019 as all states registered lower production. The lower production was led by Negeri Sembilan which dropped by 29.3% mom to 31.77k tonnes, followed by Pahang (-21.6%), Johor (-17.8%), Terengganu (-15.5%), Kelantan (-15.0%) and Sabah (-1123%). As for Jan-Dec 2019 period, CPO production increased 1.75% yoy to 19.86m tonnes; slightly below from our forecast of 19.99m tonnes (-0.65%). We forecast CPO production for this year to be flat or slightly reduced from 2019 figure on reduced yields due to dry weather, biological tree stress and low fertilisers usage.

Average CPO price forecast maintained at RM2,480/MT for 2020.

The 3-month CPO futures price in the month of December traded higher, closing the month at RM3,052/MT. In-line with the derivatives market, CPO price for local delivery, i.e. MPOB’s average CPO price increased 12.8% mom to RM2,813/MT against RM2,493.50/MT recorded in the previous month. Nevertheless, for Jan-Dec 2019 period, the MPOB average CPO price was down by RM116/MT or -5.2% to RM2,119/MT against RM2,235/MT recorded in the same period last year; but 3.4% above our 2019 average CPO price forecast of RM2,050/MT.

We are predicting that CPO price for the first-quarter of 2020 to trade within a range of RM3,100/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 vegetable oil especially in US.

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 palm oil is insufficient to compensate for the expected weak production and higher costs – which would continue to be a risk to planters’ earnings. As most of the plantation companies under our coverage are currently fully valued, in our view, we have Hold recommendation on KLK (TP: RM23.80), HAPL (TP: RM1.90), TSH (TP: RM1.21), GENP (TP: RM10.60), SOP (TP: RM3.72), FGV (TP: RM1.39), Sarawak Plant (TP: RM2.05), SDPL (TP: RM5.00) and IOI (TP: RM5.00) whilst nonrated for TH Plant.

Source: BIMB Securities Research - 10 Jan 2020