Palm oil inventory increased for the first time since Sep-19, by 1.7% MoM to 1.73m tonnes in Mar-20, as higher exports were more than offset by higher output and lower domestic disappearance. Palm oil stockpile will likely resume on downtrend in coming month, as weaker demand (arising from Covid-19 pandemic) will likely be mitigated by lower palm output (assuming closure of palm oil operations in most parts of Sabah to remain), and restocking activities ahead of Ramadhan month. We maintain our projected average CPO prices of RM2,350/tonne in 2020 and RM2,400/tonne for 2021. Maintain Neutral stance on the sector, given our less bullish view on the sector’s near term prospects. For exposure, out top pick is KLK (BUY; TP: RM22.82).

DATA HIGHLIGHTS

First increase in stockpile since Sep-19. Palm oil inventory increased for the first time since Sep-19, by 1.7% MoM to 1.73m tonnes in Mar-20, due mainly to seasonally higher output and lower domestic disappearance, which more than offset higher exports. The stockpile came in higher than Bloomberg consensus median estimate of 1.65m tonnes.

Output increased for second straight month. Palm oil output increased by 8.4% MoM to 1.4m tonnes in Mar-20, driven mainly by considerably higher output in Peninsular Malaysia (which recorded a MoM growth of 11. 9% vs. a MoM growth of 4.3% recorded in East Malaysia). Cumulatively, output declined by 22.1% YoY to 3.86m tonnes in 1Q20, (with Penisular Malaysia region and Sabah recording YoY output decline of 24.1% and 29.1%, respectively), due to lagged impact from (i) dry weather experienced in early-2019 and (ii) cutback in fertilisers earlier (amidst low CPO price environment).

Exports rise for the first time since Oct-19. Exports increased for the first time since Oct-19, by 9.2% MoM to 1.18m tonnes, as weaker exports demand from China (-5.6%, due mainly to Covid-19 pandemic, we believe) and India (-48.9%) were more than mitigated by significantly higher demand from EU (+ 28.7%) and Pakistan (+43.0%). Cumulatively, exports fell 24.8% YoY to 3.48m tonnes in 1Q20, and this was due mainly to notable declines in palm oil exports to China (-15.7%), India (-92.9%) and EU (-11.1%) due to Covid-19 pandemic, trade spat with India, and the sharp rise in palm oil prices (particularly, during Jan-20), which had in turn resulted in weaker demand for biodiesel (particularly for non-discretionary purposes).

HLIB’s VIEW

Forecast. Palm oil stockpile may resume on downtrend in Apr-20, as weaker demand (arising from Covid-19 pandemic) will likely be mitigated by lower palm output (assuming closure of palm oil operations in most part of Sabah to remain), and restocking activities ahead of Ramadhan month. We maintain our projected average CPO prices of RM2,350/tonne in 2020 and RM2,400/tonne for 2021.

Maintain NEUTRAL. We maintain our NEUTRAL stance on the sector given our less bullish view on the sector’s near term prospects, stemming from (i) Covid-19 pandemic (which will have negatively impact palm oil demand), and (ii) low crude oil price environment (which will continue to hamper demand for biodiesel, particularly for discretionary blending purpose). For exposure, our top pick is KLK (BUY; TP: RM22.82).

Source: Hong Leong Investment Bank Research - 13 Apr 2020