Palm oil inventory remained on a downtrend (for the second straight month), declining by 4.4% MoM to 2.26m tonnes in Nov-19, as weaker exports were more than offset by seasonally lower production (-14.4%). We believe palm oil stockpile will continue to trend down in Dec-19, as seasonally low production season will more than mitigate the absence of near-term notable festive-driven demand catalyst and seasonally weaker demand China (arising from winter season). We maintain our average CPO price assumptions of RM2,100/tonne and RM2,400/tonne for 2019-2020. We maintain our OVERWEIGHT stance on the sector, given our optimism on its prospects. For exposure, our top picks are FGV (BUY: TP: RM1.44), and Genting Plantations (BUY; TP: RM11.80).

DATA HIGHLIGHTS

Palm oil inventory declined for the second consecutive month (by 4.1% MoM) to 2.26m tonnes in Nov-19 (the lowest since Aug-19). The inventory came in slightly higher than Reuter’s survey forecast of 2.22m tonnes due mainly to lower-than expected exports.

MoM production decline accelerated in Nov-19. Overall production remained on downtrend for the second consecutive month, declining by 14.4% MoM to 1.54m tonnes in Nov-19, as the decline in most states accelerated (particularly, Johor, Kelantan, Pahang, Sabah, and Sarawak). YTD, production grew 4.6% to 18.5m tonnes in 11M19, fuelled mainly by higher FFB yields in Peninsular Malaysia (which increased 1.1 tonnes/ha to 16.83 tonnes/ha, arising mainly from the yield expansion in 1H19).

Weaker demand from India and EU dragged Nov-19 exports. Exports declined by 14.6% MoM to 1.4m tonnes in Nov-19, as higher exports to China (+23.5%) and Pakistan (+11.8%) were more than negated by weaker exports to India (-35.1% due to Indian government’s move to hike import duty on processed palm oil from Malaysia, we believe) and EU region (-11.5%).

Palm oil shipment for the first 10 days of Dec-19. Cargo surveyor (Amspec) indicated that palm oil exports declined by 11.3% MoM to 367k tonnes during the first 10 days of Dec-19.

HLIB’s VIEW

Forecast. We believe palm oil stockpile will continue to trend down in Dec-19, as seasonally low production season will more than mitigate the absence of near-term notable festive-driven demand catalyst and seasonally weaker demand China (arising from winter season). We maintain our average CPO price assumptions of RM2,100/tonne and RM2,400/tonne for 2019-2020.

Maintain OVERWEIGHT. We maintain our OVERWEIGHT stance on the sector given our optimism on the sector’s prospects supported by supply constraints (arising from potential palm production deficit in Malaysia and Indonesia, and lower soybean output in US) and more positive demand prospects (arising higher biodiesel mandate in Malaysia and Indonesia from 2020 onwards, and spreading ASF outbreak). For exposure, our top picks are FGV (BUY: TP: RM1.44), and Genting Plantations (BUY; TP: RM11.80).

Source: Hong Leong Investment Bank Research - 17 Dec 2019