Palm oil inventory eased by 4.6% MoM to 2.92m tonnes in Mar-19 as seasonally higher production was more than offset by stronger exports. We maintain our average CPO price assumptions of RM2,300/tonne for 2019 and RM2,400/tonne for 2020 (2018: RM2,235/tonne). We believe stockpile will likely ease from hereon (albeit on a gradual basis). Exports will likely improve from Apr-19 onwards (arising from restocking activities ahead of Ramadhan season), and this would more than mitigate seasonally higher palm output, resulting in gradual drawdown in palm inventory. Maintain our UNDERWEIGHT stance on the sector.

DATA HIGHLIGHTS

Stockpile eased on stronger exports. Palm oil inventory declined by 4.6% MoM to 2.92m tonnes in Mar-19 as seasonally higher production was more than offset by stronger exports.

Against consensus… The stockpile came in higher than Bloomberg consensus estimate of 2.87m tonnes, on the back of higher-than-expected output and marginally lower-than-expected exports.

Output recovered for the 1st time since Oct-18… By 8.2% MoM to 1.67m tonnes in Mar-19 due mainly to seasonal effect (historically, palm output eases for 4-5 months after reaching its peak in Sep-Oct). On YoY basis, 1Q19 output increased by 10% to 4.95m tonnes, indicating that lingering effect of El Nino has subsided.

Exports strengthened in Mar-19… By 22.4% MoM to 1.62m tonnes in Mar-19, boosted mainly by higher exports to China (+113.5%) and Pakistan (+66.8%).

Cargo surveyor (ITS) estimated that Malaysia’s palm oil exports rose 12.6% MoM to 435k tonnes for the 1st 10 days of Mar-19.

HLIB’s VIEW

Forecast. We maintain our average CPO price assumptions of RM2,300/tonne for 2019 and RM2,400/tonne for 2020 (2018: RM2,235/tonne). We believe stockpile will likely ease from hereon (albeit on a gradual basis). Exports will likely improve from Apr-19 onwards (arising from restocking activities ahead of Ramadhan season), and this would more than mitigate seasonally higher palm output, resulting in gradual drawdown in palm inventory.

Maintain UNDERWEIGHT. We maintain our Underweight stance on the sector, underpinned by its pricey valuations, weak near-term outlook (arising from current high stockpile level and absence of positive demand catalyst).

Source: Hong Leong Investment Bank Research - 11 Apr 2019