Palm oil inventory rose by 10.5% MoM to 3.01m tonnes in Nov-18, as seasonally lower output was more than outweighed by a plunge in exports. Palm oil stockpile will remain elevated in coming months, on the back weaker exports. We maintain our average CPO price assumption of RM2,500/tonne for 2019 (pending a review with downward bias in our upcoming sector report). Based on our sensitivity analysis, every RM100/tonne decline in our average CPO price assumption will translate to a 4.3-21.9% decline in FY19 core net profit forecasts for plantation companies under our coverage. Maintain Neutral stance.

DATA HIGHLIGHTS

Record high stockpile. Palm oil inventory increased for the 6th consecutive month, rising by 10.5% MoM to 3.01m tonnes in Nov-18, as seasonally lower output was more than outweighed by a plunge in exports.

Against consensus… The stockpile came in slightly higher than Bloomberg consensus estimate of 2.99m tonnes, mainly on the back of weaker-than-expected exports which more than offset weaker-than-expected production.

Production declined for the 1st time in 5 months… By 6.1% to 1.85m tonnes in Nov-18, due mainly to seasonal effect (as production typically eases for 4-5 months after reaching its peak around Sept-Oct).

Total exports declined for 2 consecutive months… By 12.9% MoM to 1.38m tonnes in Nov-18, as a sharp increase in exports to India (+143.9% MoM) was more than offset by lower exports to other major importing countries, such as China (-20.9% MoM), EU (-11.4% MoM) and Pakistan (-19.7% MoM).

Cargo surveyor ITS indicated that Malaysia’s palm oil exports declined by 0.8% MoM to 308k tonnes during the 1st 10 days of Dec-18.

HLIB’s VIEW

Stockpile to remain elevated in coming months. We are maintaining our view that palm oil stockpile will remain elevated in coming months, mainly on the back weaker exports (arising from winter season and absence of festive-driven demand).

Forecast. We maintain our average CPO price assumption of RM2,500/tonne for 2019 (pending a review with downward bias in our upcoming sector report). Based on our sensitivity analysis, every RM100/tonne decline in our average CPO price assumption will translate to a 4.3-21.9% decline in FY19 core net profit forecasts for plantation companies under our coverage (see Figure #4).

YTD, CPO spot price averaged at RM2,261/tonne (-19.9% YoY), mainly on (i) ample vegetable oil supplies arising from trade spat between US and China (which has resulted in China switching its soybean import destination from US to other major soybean producing countries, resulting in lower soybean prices, hence dragging prices of palm oil products), and bumper palm oil crop (mainly from Indonesian estates), and (ii) absence of demand growth catalyst. The weak CPO price environment will likely protract into 1Q19, arising from bumper crop (particularly in Indonesia) and the absence of positive demand catalyst.

Maintain NEUTRAL. We maintain our NEUTRAL stance on the sector. We remain less sanguine on the sector’s near term earnings growth prospects (at least until 1Q19), mainly on the current weak CPO price environment.

Source: Hong Leong Investment Bank Research - 11 Dec 2018