We believe CPO price will recover from 2Q19 onwards, supported by (i) the extension of biodiesel mandates in Malaysia and Indonesia, (ii) weak ringgit, and (iii) potential development of an El Nino episode. Nevertheless, we do not expect palm oil prices to jump significantly higher, due to the absence of significant demand catalyst. In our earlier strategy report, we lowered our average CPO price forecasts by RM200/tonne to RM2,300/tonne in 2019 and RM100/tonne to RM2,400/tonne in 2020. Correspondingly, FY19-20 core net profit forecasts and TPs were lowered. Maintain NEUTRAL stance on the sector.

CPO price recovery by 2Q19. We believe the price weakness will sustain into 1Q19 (arising from high stockpile and absence of positive demand catalyst), and recover from 2Q19 onwards, supported by (i) the extension of biodiesel mandates in Malaysia and Indonesia, (ii) weak ringgit (against USD), (iii) potential El Nino development.

Biodiesel mandates in Indonesia and Malaysia to boost palm oil consumption. The extension of biodiesel programmes in Malaysia (from B7 to B10 effective Feb-19) and Indonesia (by extending B20 biodiesel to non-subsidy diesel) will raise CPO consumption by up to 2.9m tonnes p.a., and in turn, reduce combined palm oil stockpile of Malaysia and Indonesia by close to 40% (based on latest reported stockpile figures).

Weak ringgit to lend support to CPO prices. Our economics team projects ringgit to weaken from an average of USD/RM4.035 in 2018 to USD/RM4.10-4.30 in 2019, on the back of (i) continued concerns on Malaysia’s fiscal outlook and sovereign credit rating, and (ii) several external factors, which include modest global economic growth, gradual capital outflow from emerging market economies and uncertainties arising on the trade front. A weak ringgit (against the USD) will lend support to CPO price as it translates to better price competitiveness of palm oil against other competing vegetable oils (in particular, soybean oil).

High chance of El Nino forming in 1Q19. NOAA’s Climate Prediction Centre recently predicted that there is a 90% chance of El Nino forming in 1Q19 (and 60% chance that it will continue into the spring of 2019). The occurrence of El Nino will likely lend support to CPO prices. We note that 3 out of 4 El Nino events (which happened since 2002) did result in higher CPO prices.

We do not expect palm oil prices to jump significantly either. We do not expect palm oil prices to jump significantly higher, due to the absence of significant demand catalyst. Palm oil demand in India (the largest importing country for Malaysia’s palm oil) will likely remain lacklustre. While the Indian government has recently cut import duties on CPO and RPO (refined palm oil) to 40 and 45% respectively (from 44% and 54% currently), this may not boost India’s demand for palm oil significantly, due to Rupee depreciation and credit crunch. Besides, we note the recent plunge in crude oil price will likely deter discretionary biodiesel blending.

Forecast. In our strategy report (dated 19 Dec 2018), we lowered our 2019-2020 average CPO price forecasts by RM200/tonne to RM2,300/tonne in 2019 and RM100/tonne to RM2,400/tonne in 2020. Correspondingly, we lowered our FY19-20 core net profit forecasts and TPs for plantation companies under our coverage (see Figures #1-2). Despite the lower TPs, we maintain ratings of all plantation stocks under our coverage, due to the recent share price retracements.

Maintain NEUTRAL. While we believe CPO price has bottomed, we do not expect CPO price to jump significantly higher in the absence of major demand catalyst.

Source: Hong Leong Investment Bank Research - 4 Jan 2019