Palm oil inventory increased for the second consecutive month, by 18.3% MoM to 2.05m tonnes in Apr-20, due mainly to considerably higher output and lower domestic disappearance. Inventory will likely remain at above 2m tonnes in the coming months, on the back of seasonally higher output and weak demand (arising from Covid-19 pandemic and weak crude oil price). 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

Stockpile surpassed 2m tonnes for the first time since Jan-20. Palm oil inventory increased for the second consecutive month, by 18.3% MoM to 2.05m tonnes in Apr- 20, due mainly to considerably higher output and lower domestic disappearance, which more than offset a mild increase in exports. The stockpile came in higher than Bloomberg consensus median estimate of 1.89m tonnes.

Output – third consecutive month increase since Jan-20. Output rose 18.3% MoM to 1.65m tonnes in Apr-20, as most states recorded higher output (with the exception of Sarawak, which recorded a 2.1% MoM decline in output). On a cumulative basis, output declined by 16.6% to 5.51m tonnes in 4M20, dragged by (i) dry weather experienced in early-2019 and (ii) cutback in fertilisers earlier (amidst low CPO price environment).

Exports – lifted mainly by higher exports to China and EU. Exports increased for the second consecutive month, by 4.4% MoM to 1.24m tonnes in Apr-20, helped by higher exports to China (+34.7%) and EU region (+7.1%). Exports to India remained negligible in Apr-20, and we believe this was due mainly the former’s “soft ban” on palm oil importation from Malaysia. Zooming in on product breakdown, we saw MoM increase in exports of most products, with the exception of biodiesel (which exports fell 90% MoM to 6.4k tonnes in Apr-20), due to sharply lower crude oil price, which has in turn, weakened demand for biodiesel (particularly for non-discretionary purpose). On a cumulative basis, exports fell 24.8% to 4.72m tonnes in 4M20, due mainly to Covid-19 pandemic and trade spat with India, which have collectively resulted in exports to China and India declining by 67.7%.

HLIB’s VIEW

Forecast. Inventory will likely remain at above 2m tonnes in the coming months, on the back of seasonally higher output and weak demand (arising from Covid-19 pandemic and weak crude oil price). YTD, CPO price averaged at RM2,493/tonne, and we are still keeping to 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 May 2020