Palm oil inventory ended marginally higher (by 0.1% MoM) at 1.7m tonnes in Aug-20, as higher output and lower exports were partly offset by lower imports and higher domestic consumption. We believe stockpile will remain on uptrend in the near term, due to seasonally stronger output and lower exports to key importing countries, in particular, India and China. While we are still holding the view that current high CPO price will unlikely sustain into the remaining months of 2020, CPO price will likely average at RM2,450-RM2,500/tonne in 2020 (higher than our current projection of RM2,350/tonne). For now, we maintain our average CPO price projections of RM2,350-2,400/tonne in 2020-21, pending further review on the sector. We maintain our Neutral stance on the sector. For exposure, our top pick is TSH Resources (BUY; TP: RM1.14). DATA HIGHLIGHTS

Marginally higher stockpile in Aug-20. Palm oil inventory ended marginally higher (by 0.1% MoM) at 1.7m tonnes in Aug-20, as higher output and lower exports were partly offset by lower imports and higher domestic consumption. The stockpile came lower than Bloomberg consensus median estimate of 1.78m tonnes, due mainly to higher-than-expected exports.

Output: Lifted mainly by higher output in East Malaysia region. Total output resumed on uptrend, rising by 3.1% MoM to 1.86m tonnes in Aug-20, driven mainly by an 8.4% MoM rise in Sarawak and a 3.2% increase in Sabah.

On a cumulative basis, total output declined by 4.7% to 12.7m tonnes in 8M20, 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. Exports declined for the first time since Feb-20, by 11.3% MoM to 1.58m tonnes in Aug-20, dragged mainly by lower exports to India (-27.6%), EU (-7.5%) and Pakistan (-44.8%).

On a cumulative basis, total exports fell 11.5% to 11.2m tonnes in 8M20, 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 Sep-20. Cargo surveyor Amspec Agri indicated that palm oil exports rose 20% MoM to 430k tonnes for the first 10 days of Sep-20.

HLIB’s VIEW

Forecast. We believe stockpile will remain on an uptrend in the near term, due to seasonally stronger output and lower exports to key importing countries, in particular, India (which its edible oil inventory has normalised since Jul-20) and China (in absence of seasonal demand). YTD, CPO price averaged at RM2,526/tonne. While we are still holding the view that current high CPO price will unlikely sustain into the remaining months of 2020, full year average price will likely come in higher than our assumption of RM2,350/tonne; possibly averaging RM2,450-RM2,500/tonne. Pending a further review on the sector, we keep our assumptions for now at RM2,350- 2,400/tonne in 2020-21

Sector rating. We are keeping our NEUTRAL stance on the sector unchanged for now. For exposure, our top pick is TSH Resources (BUY; TP: RM1.14).

Source: Hong Leong Investment Bank Research - 11 Sept 2020