Palm oil inventory eased for the 1st time since May-18, by 6.7% MoM to 3.0m tonnes in Jan-19, mainly on the back of lower production, higher exports and domestic disappearance. We believe stockpile will stay elevated in Feb-19, as seasonally lower output will be offset by the absence of festive-driven demand (we believe the increase in palm oil shipment to China in Jan-19 was due mainly to restocking ahead of CNY om early-Feb). We maintain our average CPO price assumptions of RM2,300/tonne for 2019 and RM2,400/tonne for 2020, as well as our NEUTRAL stance on the sector. Share prices of most plantation stocks under our coverage have recovered considerably YTD, we are keeping our TPs and ratings under review, pending 4Q18 results by end-Feb.

DATA HIGHLIGHTS

Stockpile eases for the 1st time since May-18. Palm oil inventory eased for the 1st time since May-18, by 6.7% MoM to 3.0m tonnes in Jan-19, mainly on the back of lower production, higher exports and domestic disappearance.

Against consensus… The stockpile reported in Jan-19 was in line with Bloomberg consensus estimate of 3.0m tonnes, as higher-than-expected production (market projected production of 1.63m tonnes vs. actual production of 1.74m tonnes) was mitigated by higher-than-expected exports (market projected exports of 1.56m tonnes vs. actual exports of 1.68m tonnes).

Production declined for the 3rd straight month … by 3.9% to 1.74m tonnes in Jan- 19, due mainly to seasonal effect (as production typically eases for 4-5 months after reaching its peak around Sept-Oct). On YoY basis, we note that production rose by 9.5% to 1.74m tonnes, in the absence of lingering effect of El Nino.

Sharpest rise in exports since Sep-18. Total exports increased by 21.2% MoM to 1.68m tonnes in Jan-19, boosted mainly by higher exports to China (+17.9%), India (+12.0%), and EU (+160.9%). Cargo surveyor (ITS) estimated that Malaysia’s palm oil exports declined by 13% to 393.4k tonnes during the 1st 10 days of Feb-19.

HLIB’s VIEW

Stockpile to stay elevated. Despite having anticipated seasonally lower output, we believe stockpile will remain high in Feb-19, as seasonally lower output will be offset by the absence of festive-driven demand (we believe the increase in palm oil shipment to China in Jan-19 was due mainly to restocking ahead of CNY om early Feb).

Forecast. We maintain our average CPO price assumptions of RM2,300/tonne for 2019 and RM2,400/tonne for 2020 (2018: RM2,235/tonne).

Maintain NEUTRAL. Share prices of most plantation stocks under our coverage have recovered considerably YTD, spurred mainly by optimism arising from recent US China trade negotiations and China’s pledge to increase its purchases of US agricultural products. We are keeping our TPs and ratings under review, pending 4Q18 results by end-Feb.

Source: Hong Leong Investment Bank Research - 12 Feb 2019