• Inventory surged 7.1% mom to 1.55m tonnes in April.

• CPO production improved 7.0% mom to 1.52m tonnes.

• Palm oil exports increased 12.6% mom to 1.34m tonnes.

• Maintain Neutral on the sector with target average CPO price of RM2,950/MT for 2021 and RM2,700/MT for 2022.

Closing stocks increased 7.1% mom to 1.55m tonnes in March

Palm oil inventory increased in Apr’21 by 7.07% mom to 1.55m tonnes against 1.44m tonnes in Mar’21 as higher export failed to negated the increase in production during the month. Notably, both PPO (processed palm oil) and CPO stocks rose significantly to 761.6k tonnes (+8.4%) and 785.4k (+5.8%) tonnes respectively during the period. But still, the stockpiles remain relatively lower as at end Apr21, improved 24.38% to 1.546m tonnes against 2.045m tonnes recorded in Apr20.

We expect stocks level in the next couple of months would continue to be elevated in the region of 1.50m tonnes to 1.60m tonnes, in view of 1) production is expected to recover gradually on the back of favourable weather conditions and production cycle is moving into seasonally higher PO productive month, 2) demand will be slower post festivities as replenishment activities completed and normalise, compounded by an increase in competition from Indonesia, as well as from other edible oils especially soybean oil, rapeseed oil and sunflower oil, and 3) resurgence of Covid-19 will slow the PO intake especially from India.

Production surged 6.98% mom to 1.52m tonnes.

CPO production increased 6.98% mom (-7.86% yoy) to 1.523m tonnes in Apr 2021 from 1.423 tonnes registered in previous month. Mostly all states in Malaysia recorded mom higher CPO production, except for Selangor, Kedah and Perak, which declined by 1.5%, 1.2% and 0.3% respectively to 49.4k tonnes, 22.8k tonnes and 176.7k tonnes of CPO. Conversely, Year-to-date production decreased by 6.04% yoy to 5.181m tonnes against 5.514m tonnes for the same corresponding period of last year - as we believe lower FFB yield would continue to shadow the CPO production as productivity is wedged by the lag impact of weaker yield from the dry weather experienced in 2019 and lower fertilizer application in 2018/19, coupled with hiccup in harvesting productivity due to labour shortage issues.

Maintain 2021/22 average CPO price forecast at RM2,950/MT-RM2,700/MT

The BMD’s 3-month CPO futures prices for the month of April continued its bullish trend, tracking the rally in soybean oil market and positive sentiment on strong export of palm oil. Hence, July contract was higher at RM3,868/MT (+7.09% mom). Conversely, the average CPO price for local delivery increased 4.4% mom (+83.6% yoy) to an average of RM4,220.00/MT against RM4,041.50/MT recorded in the previous month. As for Jan-Apr 2021 period, the MPOB average CPO price of RM3,976/MT was higher by RM1,374/MT or 52.8% against RM2,602/MT recorded in the same period last year.

Given the optimistic view on CPO price’s outlook, we foresee that price for the secondquarter of 2021 to trade within a range of RM4,700/MT and RM3,800/MT. This augurs well for our positive view on the prospect of tight palm oil supply, underpinned by a hiccup in PO production as well as rally in SBO prices on account of tight vegetable oil supplies and expectations of higher demand for soybean oil for biofuel feedstocks.

We believe the possible negative factors for CPO price are 1) slower-than-expected economic growth and consumption of edible oils, 2) lower-than-expected demand due to changes in government policies of importing countries, 3) higher-than-expected supply and stockpiles of Soybean and SBO, 4) narrowing of the price differential between CPO and SBO, 5) weakening of crude oil prices, and 6) resurgence of Covid-19 pandemic with another round of movement restriction.

Maintain “Neutral”

Maintain Neutral call on plantation sector as prices, in our view, will moderate following the anticipated pullback in palm products price towards the end of the second-half of 2021. The high operational costs and suppressed profit margin on lower-than-expected production might affect earnings moving ahead coupled with continuous challenges and obstacle faced by the industry. On the contrary, upstream players' current low PER implies that market may be ignoring the growth potential to be generated by these companies for 2020/21. As such, we have BUY call on TSH (RM1.23), Sarawak Plant (RM2.64), IOI (RM4.80), KLK (RM24.40) and HAPL (TP: RM2.17), whilst HOLD recommendation on SOP (RM4.50), GENP (TP: RM10.00), FGV (TP: RM1.30) and SDPL (TP: RM5.40); and non-rated for TH Plant.

Source: BIMB Securities Research - 10 May 2021