Palm oil inventory declined by 1.8% MoM to 1.3m tonnes in Feb-21, dragged mainly by lower output and imports. While high palm oil prices will result in weaker demand from price sensitive importing countries, this will likely be offset by low palm oil production (arising from labour shortage), hence resulting in stockpile remaining at low level in coming months. We maintain our CPO price assumption of RM2,700/tonne for 2020-2022. We maintain our NEUTRAL rating on the sector. For exposure, our top picks are Hap Seng Plantations (BUY; TP: RM2.17), IJM Plantations (BUY; TP: RM2.29) and TSH Resources (BUY; TP: RM1.35).

DATA HIGHLIGHTS

Stockpile declined MoM in Feb-21. Palm oil inventory declined by 1.8% MoM to 1.3m tonnes in Feb-21, dragged mainly by lower output and imports (but partly offset by lower exports). Against Bloomberg consensus, the stockpile came in lower than the median estimate of 1.4m tonnes, due mainly to lower-than-expected output.

Output: Downtrend continued in Feb-21. Total output remained on a downtrend (for the fifth consecutive month), declining by 1.9% MoM to 1.11m tonnes in Feb-21, dragged by seasonally low production season, and further exacerbated by labour shortage (resulting from Covid-19 pandemic, which restricted the entry of foreign labour into the country). Cumulatively, total output declined by 9.3% to 2.23 tonnes during the first 2 months of 2021, due mainly to labour shortage (we believe).

Exports: Downtrend continued on seasonality and high CPO prices. Exports remained on downtrend, declining by 5.5% MoM to 0.9m tonnes in Feb-21, with most key export destinations, such as China, India, Pakistan, and USA declining by 26.1%, 1.4%, 45.7% and 53.1% MoM, respectively. We believe the plunge in exports was due mainly to seasonal factor (as demand for palm oil is historically lower during winter season) and high CPO prices (which in turn curtailed demand from price-sensitive countries). Cumulatively, exports declined by 19.7% to 1.84m tonnes during the first 2 months of 2021, as higher exports to India (low base effect, as exports to India in early-2020 were hit by trade spat with India) were more than negated by lower exports to China and EU.

Exports for the first 10 days of Mar-21. Cargo surveyor Amspec Agri indicated that palm oil exports fell 22.1% MoM to 311k tonnes during the first 10 days of Mar-21.

HLIB’s VIEW

Forecast. While high palm oil prices will result in weaker demand from price sensitive importing countries (such as India and Pakistan), this will likely be offset by low palm oil production (arising from labour shortage), hence resulting in stockpile remaining at low level in coming months. We maintain our CPO price assumption of RM2,700/tonne for 2020-2022. We believe CPO price will remain elevated thru 1Q21. Beyond 1Q21, we anticipate CPO price to soften, on the back of better supply outlook for major edible oils (based on the assumptions that labour shortage in Malaysia will gradually ease from 2021 onwards), which will result in more balanced demand supply dynamics. We maintain our NEUTRAL rating on the sector. For exposure, our top picks are Hap Seng Plantations (BUY; TP: RM2.17), IJM Plantations (BUY; TP: RM2.29) and TSH Resources (BUY; TP: RM1.35).

Source: Hong Leong Investment Bank Research - 11 Mar 2021