Stockpile dropped further to 1.68m tonnes

• Inventory improved 4.2% mom to 1.68m tonnes

• CPO production increased 10.0% mom to 1.29m tonnes

• Palm oil exports dropped 10.8% mom to 1.08m tonnes.

• Maintain Neutral on the sector with target average CPO price of RM2,480/MT for 2020.

Closing stocks eased further to 1.68m tonnes in February

Inventory in February 2020 fell 4.2% mom to 1.682m tonnes (-45% yoy); the lowest since June 2017. The decline in inventory was due to increase in local consumption (+18% mom) of 346k tonnes and lower import recorded during the month. Imports dropped 22% mom to 67k tonnes from 85k tonnes in January 2020. Breaking down the inventory level, both stocks from CPO and PPO (processed PO) decreased 0.2% mom (-56% yoy) and 8% mom (-26% yoy) respectively to 843k tonnes and 839k tonnes – with Sabah and Sarawak recorded lower CPO stockpile. We expect stock level to remain at 1.7m-1.8m tonnes in March 2020 before gradually increases in April/May 2020.

Export dropped 11% to 1.08m tonnes

Palm oil export volume dropped 10.8% mom to 1.082m tonnes in Feb 2020 as major importing countries like India, China, EU and Pakistan reduced their intake of PO. We believe PO export would continue to be muted in the next couple of months given 1) lower intake from India – the prolonged dispute between Malaysia-India which has affected PO trade, and 2) slower demand from China due to coronavirus outbreak.

Given the tight supply situation of PO this year, we estimate demand to normalise in 2H2020 as the disruption in demand and supply chain will lead to firms increasing their use of current stocks, hence, encouraging restocking activities.

Production increased 10.0% mom to 1.29m tonnes.

Surprisingly, Malaysia’s CPO production increased 10% mom (-17% yoy) to 1.289m tonnes in Feb 2020 as all states except for Sarawak and Terengganu registered higher production. The higher production was led by Negeri Sembilan which increase by 49% mom to 45k tonnes, followed by Selangor (+38%), Kedah (+35%), Perak (+27%) and Johor (+23%). As for Jan-Feb 2020 period, CPO production dropped 25% yoy to 2.46m tonnes. We forecast CPO production for this year to be flat or slight decline 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 BMD’s 3-month CPO futures price for the month of February traded lower, falling below RM2,600/MT to close the month at RM2,319/MT (-10.9% mom) as concern on demand heighten with COVID-19 spreading rapidly outside China. In-line with the derivatives market, average CPO price for local delivery dropped 9.9% mom to close the month at RM2,715/MT. Nevertheless, for January-February 2020 period, the MPOB average CPO price was higher by RM795/MT or 38.4% against RM2,069/MT recorded in the same period last year.

In view of sluggish exports, tumbling crude oil prices, heighten concern about the rapid spread of COVID-19 outside China and lower SBO prices, we expect CPO price for Mar-Apr 2020 to trade lower within a range of RM2,000/MT-RM2,300/MT. Nonetheless, for 1Q20, we foresee that CPO price might trade within a range of RM3,111/MT-RM2,100/MT against RM2,153/MT-RM1,834/MT realised in 1Q19. In our opinion, the downside for CPO price is limited, i.e. price is likely to stay above RM2,000/MT given 1) lower FFB production from Malaysia and Indonesia, and 2) higher biodiesel take off from Indonesia and Malaysia.

Risk factors would include

1) lower-than-expected demand due to changes in government policies of importing countries, 2) weakening of crude oil prices – PO becomes less attractive for biofuel feedstock, and 3) unforeseen market changes I.e. coronavirus.

Maintain “Neutral”

Maintain Neutral on the sector. We estimate that a higher ASP of palm oil is insufficient to compensate for the expected weak production, slower demand and higher costs which would continue to be a risk to planters’ earnings. We have BUY call on IOI (RM5.00), HAPL (RM1.90), SOP (RM3.72) and Sarawak Plant (RM2.05) whilst HOLD recommendation on KLK (TP: RM23.80), TSH (TP: RM1.21), GENP (TP: RM10.60), FGV (TP: RM1.23), SDPL (TP: RM4.83) and IOI (TP: RM5.00); and non-rated for TH Plant

Source: BIMB Securities Research - 10 Mar 2020