We believe CPO price will remain elevated (at above RM3,000/mt) until 1Q21, supported by supply tightness of major edible oils, low inventory levels in major edible oil consuming countries, and La Nina phenomenon. Beyond 1Q21, we anticipate CPO price to soften from 2Q21 onwards, on the back of better supply outlook for major edible oils, which will in turn result in more balanced demandsupply dynamics. Besides, current high POGO spread and price spread between CPO and soy oil also point towards a weaker CPO price. Maintain CPO price projection of RM2,700/tonne (for 2021-2022) and Neutral stance on the sector. For exposure, or top picks are Hap Seng Plantations (BUY: TP: RM2.17), IJMP (BUY: RM2.17) and TSH Resources (BUY: RM1.38).

CPO price ended the year of 2020 with a bang. After falling to below RM2,100/tonne in May-2020 (due to Covid-19 pandemic), CPO price started recovering swiftly since then and ended 2020 on a high note (at RM3,850/tonne), due to supply shortfall (arising from labour shortage, La Nina phenomenon) and demand recovery (following the resumption of economic activities by major economies since Jun-2020).

Strong CPO price to sustain into 1Q21. CPO price will likely remain elevated until 1Q2021, supported by (i) concerns on palm supply tightness in both Malaysia and Indonesia, (ii) seasonally low production cycle for palm oil, which will result in palm oil inventory remaining on a declining mode; (iii) low inventory level for edible oil in major edible oil consuming countries, which will continue to underpin demand for edible oils including palm oil; and (iv) La Nina phenomenon, which has in turn resulted in slow soybean planting progress in Brazil and lower soybean yield in US.

Expect softer CPO price beyond 1Q21. We anticipate CPO price to soften from 2Q21 onwards, on the back of better supply outlook for major edible oils, which will in turn result in more balanced demand-supply dynamics.

Supply of major edible oils to return to normalcy in 2021. We believe supply of major edible oils will gradually return to normalcy from 1Q21, supported by (i) higher palm production in Malaysia and Indonesia from Mar-21 (based on the assumptions that labour shortage in Malaysia will gradually ease from 2021 onwards and La Nina does not strengthen further), and (ii) higher soybean production in 2021. We note that Oilworld is still projecting total soybean supply in the world to increase by circa 7% to 361.8m tonnes in 2020-2021, supported mainly by higher planting acreage. Besides, farmers in the US may plant significantly more soybean (at the expense of corn), given the high soybean price currently.

CPO currently trading at premium to soy oil. CPO is currently trading at premium to soy oil vis-à-vis a US$100/tonne discount to soy oil (historical 5-year average). Given our anticipation of a recovery in palm production in 2020, we believe the price spread between CPO and soy oil will start normalising once palm production shows signs of improving (expected by Mar-21), hence resulting in CPO price trending downwards.

Maintain NEUTRAL. We maintain our CPO price projection of RM2,700/tonne (for 2021-2022) and Neutral stance on the sector, as we believe current high CPO price will not sustain over the longer term. Among the plantation stocks under our coverage, small-to-mid cap plantation players will likely outperform the big cap players, due to their emphasis on upstream plantation segment (which tends to performs better vis -àvis the integrated players amidst rising CPO prices). Our top picks are Hap Seng Plantations (BUY: TP: RM2.17), IJM Plantations (BUY: RM2.17) and TSH Resources (BUY: RM1.38).

Source: Hong Leong Investment Bank Research - 5 Jan 2021