We believe the tight near-term palm supply could no longer mitigate the potential impact arising from Covid-19 pandemic (which has yet to show signs of easing at the time of writing) and crude oil price slump (which has resulted in widening POGO spread), which have prompted us to revisit our projected average CPO price assumptions for 2020-2021. We lower our average CPO price assumptions by RM150-200/tonne to RM2,350/tonne in 2020 and RM2,400/tonne in 2021 to reflect our less sanguine view on palm oil’s demand outlook. Correspondingly, we lower our core net profit forecasts and TPs for plantation companies under our coverage. Post revisions in TPs, we downgrade our ratings on CBIP and Genting Plantations (from Buy to HOLD). Ratings for other plantation stocks, on the other hand, remain unchanged. Downgrade our sector rating to NEUTRAL (from Overweight).

4Q19 results wrap up. 2 out of 9 companies (FGV and TSH Resources) missed estimates, 4 companies (namely CBIP, Hap Seng Plant, IJMP and Sime Darby Plant) reported better-than-expected results, while the remaining 3 companies (namely Genting Plant, IOI, and KLK) met our expectations. Most companies did not fully capture the upcycle in CPO prices during 4Q19 (evidenced by their respective realised CPO prices) as most companies shared that they locked in CPO sales when CPO prices were at early stage of run-up.

Revisiting CPO price assumptions. In our view, the tight near-term palm supply could no longer mitigate the potential impact arising from Covid -19 pandemic (which has yet to show signs of easing at the time of writing) and crude oil price slump (which has resulted in widening POGO spread), which prompted us to revisit at our projected average CPO price assumptions for 2020-2021.

Covid-19 to impact palm oil demand and price. Covid-19 outbreak will likely have a negative impact on palm oil demand and price (especially if it persists), as the World Health Organisation (WHO) has recently changed its classification on Covid-19 to a pandemic (from a public health emergency of international concern previously), due to the speed and scale of transmission.

Crude oil price slump raises uncertainties on biodiesel mandate. The deterioration in POGO spread (following the drastic decline in crude oil price) raises questions on viability of existing biodiesel mandates (in Indonesia, Malaysia, Brazil, US, and Europe). While it seems unlikely for Indonesian government to revise its biodiesel mandate (at least for now, given its plan to increase palm oil export levies to support expansion of its palm biodiesel programme), the risk of such revision (in other countries) will still cap the upside potential for prices of palm oil and other vegetable oils.

Forecasts and stock rating changes. We lower our average CPO price assumptions by RM150-200/tonne to RM2,350/tonne in 2020 and RM2,400/tonne in 2021 to reflect our less sanguine view on palm oil’s demand outlook. Correspondingly, we lower our core net profit forecasts and TP for plantation companies under our coverage. Post revisions in TPs, we downgrade our ratings on CBIP and Genting Plantations (from Buy to HOLD). Ratings for other plantation stocks, on the other hand, remain unchanged.

DOWNGRADE to NEUTRAL. Following the downward revisions in our core net profit forecasts and TPs, we downgrade our sector rating to NEUTRAL (from Overweight earlier).

Source: Hong Leong Investment Bank Research - 18 Mar 2020