Palm oil stockpile remained on uptrend, rising by 1.5% MoM to 1.57m tonnes in May-21, due mainly to higher output and lower exports, but partly offset by higher domestic disappearance and lower imports. Stockpile will likely remain at low level in coming months, as potentially weaker exports demand from India (arising from lockdown amidst Covid-19 pandemic) will likely be mitigated by resilient demand from China and low inventory levels. We maintain our CPO price assumptions of RM3,200/mt for 2021 and RM2,800/mt for 2022-23. We believe CPO price will trend down more noticeably in 2H21, on the back of seasonally stronger palm oil output in 2H21 and demand destruction (especially among price sensitive consuming countries) amidst current high edible oil prices. We maintain our NEUTRAL rating on the sector, as we believe current high CPO price will not sustain over the longer term. Our top picks are IOI Corp (BUY; TP: RM4.67) and KLK (BUY; TP: RM26.60).

DATA HIGHLIGHTS

Third consecutive month increase in palm oil stockpile. Palm oil stockpile remained on uptrend (albeit marginally), rising by 1.5% MoM to 1.57m tonnes in May-21, due mainly to higher output and lower exports, but partly offset by higher domestic disappearance and lower imports.

East Malaysia led output growth in May-21. Total output rose for the third consecutive month, by 2.8% MoM to 1.57m tonnes in May-21, driven mainly by higher output in East Malaysia (+5.8%, of which Sabah and Sarawak recorded MoM output growth of 8.6%, and 2.6% respectively).

Cumulatively, output fell 5.6% to 6.76m tonnes for the first five months of 2021, due mainly to border closure (arising from Covid-19 pandemic), which has in turn resulted in labour shortfall in oil palm plantation estates.

Exports fell 6% MoM. Exports fell 6.0% MoM to 1.27m tonnes in May-21, as higher exports to China (+30.0%), India (+6.2%) and Europe (+58.7%) were more than by lower exports to Pakistan (-19.7%) and other smaller key export destinations. Cumulatively, total exports eased 7.2% to 5.64m tonnes in 5M21, due mainly to lower palm oil output YTD (in our view).

Exports for the first 10 days of Jun-21. Preliminary data from independent cargo surveyor (Amspec Agri) indicated that palm oil exports declined by 14.3% to 402.5k tonnes for the first 10 days of Jun-21.

HLIB’s VIEW

Forecast. Stockpile will likely remain at low level in coming months, as potentially weaker exports demand from India (arising from lockdown amidst Covid-19 pandemic) will likely be mitigated by resilient demand from China and low inventory levels (as supply shortfall for major edible oils persists). YTD, CPO price averaged at RM4,110/tonne, driven mainly by persisting concerns on edible oil supply. We maintain our CPO price assumptions of RM3,200/mt for 2021 and RM2,800/mt for 2022-23. We believe CPO price will trend down more noticeably in 2H21, on the back of seasonally stronger palm oil output in 2H21 and demand destruction (especially among price sensitive consuming countries) amidst current high edible oil prices.

Stay Neutral. We maintain our NEUTRAL rating on the sector, as we believe current high CPO price will not sustain over the longer term. Our top picks are IOI Corp (BUY; TP: RM4.67) and KLK (BUY; TP: RM26.60).

Source: Hong Leong Investment Bank Research - 11 Jun 2021