• Our base case scenario is for CPO price to continue trading above RM3,300/MT in the short-term before moderating in the later part of 3Q21.
• Given impact on productivity due to labor shortage issue, CPO production is forecast to increase slightly to 19.17m MT in 2021 from 19.14m MT in 2020.
• Ending stocks is anticipated to close circa 1.82m tonnes - as production improve whilst demand moderates in view of a setback in consumption as pandemic concerns continue to unfold in the importing countries.
• Demand is projected to remain supportive at 17.48m tonnes vs. 17.37m tonnes recorded in 2020 – as reopening of major economies may drive up demand.
• Maintain Overweight with new average CPO price forecast of RM3,100/MT (RM2,950/MT previously) for 2021 and RM2,700/MT for 2022.

First-half 2021 in retrospect

The price of CPO (local delivery) started 2021 on a strong note at RM3,903/MT and beating its record high on 18th May 2021 at RM4,773.50/MT before being under pressure in the middle of June on concern over high production of palm oil in Indonesia, slower demand and steep decline in soybean oil price in Chicago soybean oil market and Dalian Commodity Exchange. The weakness in CBOT was due to improved supply prospect on favourable weather pattern in crop growing areas, as well as the US’ intentions to ease biofuel requirement for biofuel blending mandate, and stronger USD. Nonetheless, CPO price capped its decline, trading above RM3,500/MT on expectations of higher exports and rebound in SBO prices.

Tight supply set to keep CPO price supported

Our base case scenario is for CPO price to continue trading above RM3,300/MT in the short-term before moderating in the later part of 3Q2021. Our bullish outlook on CPO price is a reflection of the anticipated tight supply of edible oils including palm oil production and stockpiles in Malaysia, compounded by improving demand scenario and rally in soybean oil (SBO) prices. Although any price increase could be capped by the narrowing of the price differential between CPO and SBO, we believe this is inconsequential. Supply constraints due to Covid-19 related supply chain disruptions and low inventories in some vegetable oils producing or importing countries, as well as easing of coronavirus restrictions could improve demand. These factors mean CPO price could retain its upward trajectory, trading between RM3,300/MT – RM3,600/MT, possibly up until July/Aug 2021. Hence, we raised our average CPO forecast for 2021 to RM3,100/MT from RM2,950/MT previously.

Remain Overweight on the sector

We remain positive on the earnings prospect of plantation’s companies in the short-tomedium term as we believe earnings will inevitably remain exciting as PO price stays elevated above RM3,000/MT (currently at RM3,640/MT). The higher price will amplify the revenue and earnings growth momentum possibly for the rest of 2021. Nevertheless, we are cautious that high operational costs and suppressed profit margin on lower-thanexpected production due to weaker yield and labour productivity on labour shortage issue would continue to be main risks to listed planters’ earnings. Maintain Overweight on plantation sector with BUY call on HAPL (RM2.17), SOP (RM4.50), IOI (RM4.80), KLK (RM24.40) and SIME Darby Plants (TP: RM5.00), whilst HOLD recommendation on Sarawak Plant (RM2.64), TSH (TP: RM1.23), GENP (TP: RM9.00) and FGV (TP: RM1.30); and nonrated for TH Plant.

Source: BIMB Securities Research - 27 Jun 2021