Palm oil inventory ended marginally higher (by 1.2% MoM) at 1.73m tonnes in Aug-20, as higher exports were more than offset by marginally higher output (+0.3% MoM) and lower domestic consumption (-7.6%). 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 RM2,568/tonne. Pending a further review on the sector, we keep our assumptions for now at RM2,350-2,400/tonne in 2020- 21. 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 Sep-20. Palm oil inventory ended marginally higher (by 1.2% MoM) at 1.73m tonnes in Aug-20, as higher exports were more than offset by marginally higher output (+0.3% MoM) and lower domestic consumption (-7.6%). We note the stockpile was broadly in line with Bloomberg consensus median estimate of 1.72m tonnes.

Output: Lifted mainly by higher output in Sabah. Total output was marginally higher (by 0.3% MoM) at 1.87m tonnes in Sep-20, as lower output in Peninsular region and Sarawak were more than compensated by an 11.8% MoM rise in Sabah’s output.

On a cumulative basis, total output declined by 4% to 14.59m tonnes in 9M20, 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 resumed on uptrend, rising by 1.9% MoM to 1.61m tonnes in Sep-20, as lower exports to China and EU were more than mitigated by a 13.6% MoM increase in exports to India (which in turn was boosted by low inventory level and restocking activities ahead of festive season, we believe).

On a cumulative basis, total exports fell 8.9% to 12.76m tonnes in 9M20, 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) and lower palm oil output.

Exports for the first 10 days of Oct-20. Cargo surveyor Amspec Agri indicated that palm oil exports rose 13.3% MoM to 536k tonnes for the first 10 days of Oct-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 RM2,568/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 - 13 Oct 2020