Palm Oil Inventory Declined for the Fourth Consecutive Month (by 11% MoM) to 2.0m Tonnes in Dec-19 (the Lowest Since Aug-17), Due Mainly to a 10.6% Decline in Palm Production. We Note the Latest Set of Palm Oil Data Augurs Well for Nearterm Palm Oil Price Movement. While It Is Unlikely for CPO Price to Sustain at Current Level Over the Longer Term, We Believe CPO Price Will Still Remain Considerably High (at Above RM2,500/tonne) Over the Longer Term. Hence, We Maintain Our Average CPO Price Assumptions of RM2,550/tonne for 2020-2021. We Maintain Our OVERWEIGHT Stance on the Sector, Given Our Optimism on Its Prospects. For Exposure, Our Top Picks Are FGV (BUY: TP: RM1.72), Genting Plantations (BUY: TP: RM12.82), and Hap Seng Plantations (BUY: TP: 2.29).

DATA HIGHLIGHTS

Palm oil inventory declined for the fourth consecutive month (by 11% MoM) to 2.0m tonnes in Dec-19 (the lowest since Aug-17), due mainly to a 10.6% decline in palm production. The inventory came in lower than Bloomberg consensus median estimate of 2.07m tonnes due mainly to lower-than-expected output.

Another double-digit decline in Dec-19 production. Overall production remained on downtrend for the third consecutive month, declining by 13.3% MoM to 1.33m tonnes (lowest since Feb-17).

YTD, CPO production in 2019 grew 1.8% to 19.9m tonnes, driven mainly by production growth during the first 8 months of 2019, and we note that the decline in CPO production in East Malaysia (-0.5%) was more than mitigated by a 3.8% production growth in Peninsular Malaysia.

Exports declined by 0.7% MoM to 1.4m tonnes in Dec-19, pulled mainly by lower exports to China (-24.6%) India (-2.8%), and EU (-18.7%), but partly mitigated by higher exports to other smaller palm oil importing countries (such as Egypt, Japan, Mexico, Mozambique, and Saudi Arabia).

Palm oil shipment for the first 10 days of Jan-20. Cargo surveyor (Amspec Agri) indicated that palm oil exports surged 24% MoM to 456k tonnes during the first 10 days of Jan-20.

HLIB’s VIEW

Forecast. We believe palm oil stockpile will continue to trend down in Jan-20 due mainly to seasonally low production season. We note the latest set of palm oil data augurs well for near-term palm oil price movement. While it is unlikely for CPO price to sustain at current level over the longer term, we believe CPO price will still remain considerably high (at above RM2,500/tonne) over the longer term supported mainly by (i) Indonesian government’s launch of B30 biodiesel in end Dec-19, (ii) imminent palm output deficit (arising from drought and cutback in fertilisers in 2018-2019 amidst low CPO prices), and (iii) ) African Swine Flu (ASF), which has yet to show signs of abating. Hence, we maintain our average CPO price assumptions of RM2,550/tonne for 2020-2021.

Maintain Overweight stance. We maintain our Overweight stance on the sector, given our optimism on the sector’s prospects. For exposure, our top picks are FGV (BUY: TP: RM1.72), Genting Plantations (BUY: TP: RM12.82), and Hap Seng Plantations (BUY: TP: 2.29)

Source: Hong Leong Investment Bank Research - 13 Jan 2020