Palm oil inventory eased further (by 10.6% MoM) to 1.7m tonnes in Jul-20, due mainly on higher exports and lower output. We believe stockpile will trend up from Aug-20 onwards, on the back of seasonally stronger output and lower exports to key importing countries in particular, India (which its edible oil inventory has normalised in Jul-20). We maintain our average CPO price projections of RM2,350-2,400/mt in 2020-21 and Neutral rating on the sector. For exposure, our top picks are IJMP (BUY; TP RM1.78) and TSH Resources (BUY; TP: RM1.12).

DATA HIGHLIGHTS

Higher exports helped easing palm oil inventory further. Palm oil inventory eased further (by 10.6% MoM) to 1.7m tonnes in Jul -20, due mainly on higher exports and lower output. The stockpile came in above Bloomberg consensus median estimate of 1.66m tonnes, due mainly to lower-than-expected domestic disappearance.

Output. Total output declined by 4.1% MoM to 1.81m tonnes in Jul-20, dragged by output decline in Peninsular region (particularly, Johor, Pahang, and Negeri Sembilan) and Sabah, but partly mitigated by a 10.7% MoM increase in Sarawak’s output.

On a cumulative basis, total output declined by 5.8% to 10.86m tonnes in 7M20, 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 mainly by India and EU. Exports increased for the fifth consecutive month, by 4.7% MoM to 1.78m tonnes in Jul-20. During the month, lower exports to China (-17.9%) and Pakistan (-12.1%) were more than mitigated by significantly higher exports to India (+85.0%) and EU region (+33.7%). Exports to India has risen for the fifth consecutive month (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 11.9% to 9.6m tonnes in 7M20, 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).

Exports for first 10 days of Aug-20. Cargo surveyor Amspec Agri indicated that palm oil exports fell 6.2% MoM to 430k tonnes for the first 10 days of Aug-20.

HLIB’s VIEW

Forecast. We believe stockpile will trend up from Aug-20 onwards, on the back of seasonally stronger output and lower exports to key importing countries, in particular, India (which its edible oil inventory has normalised in Jul -20). 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) and TSH Resources (BUY; TP: RM1.12).

Source: Hong Leong Investment Bank Research - 11 Aug 2020