Palm oil inventory declined by 4.1% MoM to 2.35m tonnes in Oct-19, on lower production and higher exports. We believe palm oil stockpile will continue to trend down in the next few months, as low production season has commenced, and this will more than mitigate the absence of near-term notable festive-driven demand catalyst and seasonally weaker demand China. YTD, CPO price averaged at RM2,021/tonne (vs. our projected average CPO price of RM2,100/tonne for 2019). We are in the midst of reviewing our projected average CPO price for 2020-2021 (with an upside bias). Maintain Underweight rating for now. For exposure, our top pick remains FGV (BUY; TP: RM1.22).

DATA HIGHLIGHTS

Palm oil inventory declined by 4.1% MoM to 2.35m tonnes in Oct-19, on lower production and higher exports. The inventory came in lower than Bloomberg survey’s estimate of 2.54m tonnes, mainly on the back of lower-than-expected production and higher-than-expected exports.

Overall MoM production decline led mainly by decline in Peninsular region. Production fell by 2.5% MoM to 1.8m a tonne, dragged mainly by the 2nd consecutive month of decline in Peninsular Malaysia’s output (which declined by 5% to 887k tonnes). Meanwhile, output in East Malaysia declined marginally (by 0.02% to 969k tonnes).

10M19 production grew 7.1% to 17m tonnes, fuelled mainly by higher FFB yields in Peninsular Malaysia (which increased by 0.28 tonnes/ha to 19.95 tonnes/ha) and Sabah (which increased by 0.3 tonnes/ha to 21 tonnes/ha), due to absence of lagged impact from El Nino, we believe.

Exports rebounded in Oct-19… Rising by 16.4% MoM to 1.64m tonnes, boosted mainly by higher exports to China (+23.8%) and EU region (+43.9%), which more than offset a continued decline in exports to India (-29.2% from the Indian government’s recent move to hike import duty on processed palm oil from Malaysia, we believe).

Palm oil shipment for the first 10 days of Nov-19. Both cargo surveyors (AmSpec Agri and Intertek) indicated that palm oil exports declined (on MoM basis) during the first 10 days of Nov-19.

HLIB’s VIEW

Forecast. We believe palm oil stockpile will continue to trend down in the next few months, as low production season has commenced, and this will more than mitigate the absence of near-term notable festive-driven demand catalyst and seasonally weaker demand China (arising from winter season).

YTD, CPO price averaged at RM2,021/tonne (vs. our projected average CPO price of RM2,100/tonne for 2019). We are in the midst of reviewing our projected average CPO price for 2020-2021 (with an upside bias).

Maintain Underweight. Maintain Underweight for now, pending a review in our projected average CPO price for 2020-2021. For exposure in the sector, our top pick is FGV (BUY; TP: RM1.22). We note that FGV is a proxy to rising CPO prices, given its high earnings sensitivity to CPO price movement.

Source: Hong Leong Investment Bank Research - 12 Nov 2019