Palm oil stockpile eased by 7.3% MoM to 1.5m tonnes in Jul-21, dragged mainly by lower output. Stockpile will likely remain at low level in coming months, seasonally higher palm oil production will likely be mitigated by increased restocking activities in China and India (following Indian government’s move to reduce import tax on CPO since Jun-21). We maintain our average CPO price assumptions of RM3,200/mt for 2021 and RM2,800/mt for 2022-23 for now, pending a review (with upside bias) post results season. Maintain Neutral rating, as near term share price sentiment will likely remain weak, on the back of lingering ESG concerns. Top picks are IOI Corp (BUY; TP: RM4.67) and KLK (BUY; TP: RM26.42), and TSH Resources (BUY; TP: RM1.24).

DATA HIGHLIGHTS

Palm oil stockpile eased for the first time since Feb-21. Palm oil stockpile eased by 7.3% MoM to 1.5m tonnes in Jul-21, dragged mainly by lower output. The stockpile came in sharply lower than Bloomberg consensus median estimate of 1.62m tonnes, due mainly to higher-than-expected exports.

Output fell for the first time since Feb-21. Total output fell 5.2% MoM to 1.52m tonnes in Jul-21, dragged mainly by lower output in Sabah and Sarawak, which declined by 9.7% and 6.9%, respectively.

Cumulatively, total output fell 8.9% to 9.89m tonnes in 7M21, dragged mainly by labour shortfall arising from border closure (which in turn was due to Covid-19 pandemic).

Exports fell on lower exports to China and India. Total exports fell 0.8% to 1.41m tonnes in Jul-21, due mainly to lower exports to China (-23.1%), India (-19.8%) and Pakistan (-17.7%).

Exports fell further for the first 10 days of Aug-21. Exports for the first 10 days of Aug-21. Amspec (cargo surveyor) indicated that palm oil exports fell further (by 10.3% MoM) to 410.9k tonnes during the first 10 days of Aug-21.

HLIB’s VIEW

Forecast. Stockpile will likely remain at low level in coming months, seasonally higher palm oil production will likely be mitigated by increased restocking activities in China and India (following Indian government’s move to reduce import tax on CPO since Jun - 21). We maintain our average CPO price assumptions of RM3,200/mt for 2021 and RM2,800/mt for 2022-23 for now, pending a review (with upside bias) post results season.

Results preview: upstream plantation players will see better performance in 2Q21 (on QoQ basis). Saved for IJM Plantations, most upstream players will likely report better performance on the back of better palm product prices and seasonal improvement in productivity. For integrated players, improved upstream performance (arising from the aforementioned reasons) will likely be partly weighed down by weaker downstream performance (due mainly to duty differential between Malaysia and Indonesia, and high feedstock prices).

On YoY basis. Upstream players will likely show better performance, due mainly to significantly higher palm product prices, which more than mitigated lower FFB output (during the quarter, most plantation players reported weaker FFB production, except for Genting Plantations and TSH Resources, which reported YoY FFB growth of 6.6% and 16.5%, respectively). As for the integrated players, performance at both upstream and downstream will likely be better. We expect downstream performance to improve in 2Q21, due to low base effect (recall in 2Q20, downstream earnings for most integrated players declined significantly due to logistic issue and weak demand arising from Covid - 19).

Maintain Neutral. Maintain Neutral rating, as near term share price sentiment will likely remain weak, on the back of lingering ESG concerns. Top picks are IOI Corp (BUY; TP: RM4.67) and KLK (BUY; TP: RM26.42), and TSH Resources (BUY; TP: RM1.24).

Source: Hong Leong Investment Bank Research - 12 Aug 2021