Palm oil inventory eased further (by 6.3% MoM) to 1.9m tonnes in Jun-20, due mainly to higher exports (which was in turn lifted by higher exports to China (+55.6%), India (+347.7%), and Pakistan (+35.5%)). Total output increased by 14.2% MoM to 1.89m tonnes in Jun-20, boosted mainly by a 24.5% MoM increase in Peninsular region’s output. We maintain our average CPO price projections of RM2,350-2,400/mt in 2020-21, and our Neutral rating on the sector. For exposure, our top pick is IJMP (BUY; TP: RM1.78).

DATA HIGHLIGHTS

Higher exports helped easing palm oil inventory further. Palm oil inventory eased further (by 6.3% MoM) to 1.9m tonnes in Jun-20, due mainly to higher exports. The stockpile came in slightly below Bloomberg consensus median estimate of 1.91m tonnes.

Output: Lifted by strong output recovery in Peninsular region. Total output increased by 14.2% MoM to 1.89m tonnes in Jun-20, boosted mainly by a 24.5% MoM increase in Peninsular region’s output (led mainly by Johor, Pahang, Perak and Terengganu states).

On a cumulative basis, total output declined by 7.5% to 9.05m tonnes in 1H20, dragged by weak output in 1Q20 (as a result of lagged impact arising from dry weather experienced in early-2019 and cutback in fertilisers earlier).

Exports: Lifted by Significantly Higher Exports to China, India and Pakistan.

Exports increase for the fourth consecutive month, by 24.9% MoM to 1.71m tonnes, was helped by higher exports to China (+55.6%), India (+347.7%), and Pakistan (+35.5%). India has been importing more palm oil from Malaysia since Apr-20 (albeit from a low base impact), due to improved business ties between India and Malaysia and its dwindling vegetable oil stockpile, we believe.

On a cumulative basis, exports fell 16.8% to 7.8m tonnes in 1H20, due mainly to Covid-19 pandemic and trade spat with India, which have in turn resulted in lower exports to China and India (particularly, in 1Q20). To note, exports to China and India declined by 53.9% in 1H20.

Exports for first 10 days of Jul-20. Cargo surveyor Amspec Agri indicated that palm oil exports fell 16.7% MoM to 458k for the first 10 days of Jul-20.

HLIB’s VIEW

Forecast. Despite the recent optimism, we maintain our average CPO price projections of RM2,350-2,400/mt in 2020-21, as current CPO price may not sustain into the next few months, due to (i) heightened concerns on Covid-19 resurgence, (ii) demand recovery from China may not be as strong as pre Covid-19’s level on the back of the gradual recovery in China’s hog production, (iii) narrower price gap between CPO and soy oil, and (iv) feasibility of discretionary biodiesel blending remains inexistent.

Sector rating. We are keeping our NEUTRAL stance on the sector unchanged, as we believe recent positive news flows have already been reflected in our assumptions. For exposure, out top pick is IJM Plantations (BUY; TP: RM1.78).

Source: Hong Leong Investment Bank Research - 13 Jul 2020