Palm oil inventory declined for the fourth consecutive month (by 12.7% MoM) to 1.76m tonnes in Jan-20 (the lowest since Jun-17), due mainly to lower output and imports, which more than offset weaker exports. We believe palm oil stockpile will remain low in Feb-20, as lower exports demand (particularly from China) will be mitigated by seasonally lower exports. While coronavirus outbreak and trade spat with India will cap CPO price in the near term, the setback will likely be temporary, and 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

Lowest stockpile since Jun-17. Palm oil inventory declined for the fourth consecutive month (by 12.7% MoM) to 1.76m tonnes in Jan-20 (the lowest since Jun- 17), due mainly to lower output and imports, which more than offset weaker exports. The stockpile came in slightly lower than Bloomberg consensus median forecast of 1.78m tonnes, mainly on lower-than-expected output.

Another double-digit decline in Jan-20 production. Overall production remained on downtrend for the fourth consecutive month, declining by 12.6% MoM to 1.17m tonnes in Jan-20, making it the lowest monthly output level since Feb-17.

China and India pulled overall exports lower. Exports declined for the third consecutive month, by 13.2% MoM to 1.21m tonnes in Jan-20, as higher exports to Pakistan (+87.7%), EU (+26.6%) and US (+66.9%) were more than offset by considerably lower exports to China (-31.1%) and India (-66.2%), due mainly to seasonal effect (as palm oil shipment to China typically weakens during winter season, if history is a guide) and trade spat with India, we believe.

Palm oil shipment for the first 10 days of Feb-20. Amspec Agri indicated that palm oil exports fell 20% MoM to 364k tonnes during the first 10 days of Feb-20.

HLIB’s VIEW

Forecast. We believe palm oil stockpile will remain low in Feb-20, as lower exports demand (particularly from China, due to port closure arising from coronavirus) will be mitigated by seasonally lower exports. YTD, CPO spot surged above RM3,100/tonne (on 10 Jan 2020) before easing to below RM2,900/tonne. While coronavirus outbreak and trade spat with India will cap CPO price in the near term, the setback will likely be temporary, and 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 since 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 - 11 Feb 2020