• Inventory fell by 7.3% mom to 1.50m tonnes in July.

• CPO production declined 5.2% mom to 1.52m tonnes.

• Palm oil exports slipped 0.8% mom to 1.41m tonnes.

• Maintain Overweight on the sector with average CPO price of RM3,100/MT for 2021 and RM2,700/MT for 2022.

Closing stocks fell 7.3% mom to 1.50m tonnes in July

Inventory in July 2021 improved 7.30% mom to 1.496m tonnes vs. 1.614m tonnes in June mainly supported by lower production and import as well as higher domestic consumption registered during the month. Palm oil import declined by 51.9% mom to 53.38k tonnes compared to 113.13k tonnes in June. Overall, the decline in inventory was due to lower stocks registered for both CPO (crude PO) and PPO (processed palm oil) which improved by 2.8% and 12% respectively to 703,886 tonnes and 792,574 tonnes during the period – except for Sabah, where CPO stock increase 1.9% mom to 197,259 tonnes. As of end-July21 versus a year ago, the stockpiles remain relatively lower, improved 11.9% to 1.496m tonnes against 1.61m tonnes recorded in July20.

We expect stocks level in the next couple of months would hover in the region of 1.50m tonnes to 1.60m tonnes, in view of gradual growth in production (possibly at slower rate than expected due to labour shortage issues) as production cycle is in seasonally higher palm oil productive month while export will gain momentum due to restocking activities ahead of festivities in October and November.

Production declined 5.2% mom to 1.52m tonnes.

CPO production decreased 5.17% mom (-15.73% yoy) to 1.523m tonnes in July 2021 on lower FFB yield and oil extraction rate across the country including Sabah and Sarawak. The lower OER was led by Sarawak, registered at 19.63%, followed by Negeri Sembilan 20.23%, Perak 19.31%, Pahang 19.92% and Sabah 20.82%. Year-todate production decreased 15.73% yoy to 9.887m tonnes 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 coupled with hiccup in productivity due to labour shortage issues.

Maintain 2021/22 average CPO price forecast at RM3,100/MT-RM2,700/MT

The BMD’s 3-month CPO futures prices for the month of July remained bullish, on strong market sentiment driven by the prospect of higher demand from India and China as well as the anticipation of a weaker than expected output – despite production currently in peak production cycle. This was also compounded by the rally in soybean oil price in CBOT as well as Palm Olein in Dalian Commodity Exchange. As such, CPO price at Bursa Derivatives Market (BMD) closed higher at RM4,369/MT (+21.4% mom) with the average CPO price for local delivery rising 7.8% mom (+63.9% yoy) to an average of RM4,128.50/MT against RM3,830.50/MT recorded in the previous month. As for Jan-July 2021 period, the MPOB average CPO price of RM4,062/MT was higher by RM1,575/MT or 63.3% against RM2,488/MT recorded in the same period last year.

We foresee that price for local delivery in August/September 2021 period would trade within a range of RM4,500/MT and RM3,800/MT as opposed to RM2,752/MT and RM3,074/MT recorded during the same period last year. This ties in with our positive view on the prospect of improved demand prior to festivities and tight supply situation underpinned by a hiccup in palm oil production as well as favorable SBO prices performance on higher demand for soybeans and its derivatives for food, feed-meal and 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) prolonged Covid-19 pandemic with another round of movement restriction worldwide.

Maintain “Overweight”

Maintain Overweight call on the plantation sector. Our base case scenario is for CPO prices to continue their upward trajectory in the short-to-medium-term – due to tighter supplies and improved demand – and then moderating in the later part of 3Q21 or in Oct21. In view of this, we expect plantation companies’ earnings growth to remain firmly on the upside as CPO price is anticipated to stay elevated above RM3,500/MT. We have BUY call on HAPL (RM2.17), SOP (RM4.50), TSH (TP: RM1.23), IOI (RM4.80), KLK (RM24.40) and SIME Darby Plants (TP: RM5.00), whilst HOLD recommendation on Sarawak Plant (RM2.64), GENP (TP: RM9.00) and FGV (TP: RM1.30); and non-rated for TH Plant.

Source: BIMB Securities Research - 11 Aug 2021