Malaysia’s July19 CPO production increased by 15.1% mom to 1.74m, while exports increased by 7.4% mom to 1.49m MT. The increase in production was partly due to workers returning to work after the Hari Raya holiday. We expect CPO production to rise in the coming months and peak in 4Q19. Given the higher palm-oil exports and consumption, palm-oil inventory level declined for the fifth consecutive month to 2.39m MT in July19. We still expect the global palm oil inventory to gradually decline with higher exports and higher consumption of palm-oil products going forward, supported by the energy and food sectors. Overall, we maintain our Neutral rating on the plantation sector. Our top sector BUY is Ta Ann.

July CPO Production Was Higher Throughout Malaysia

CPO production in July19 increased by 15.1% mom (and +15.6% yoy) to 1.74m MT, due to higher production throughout Peninsular Malaysia as well as Sabah and Sarawak. CPO production in Peninsular Malaysia, Sabah and Sarawak rose 16.6%, 4% and 24% mom to 974.3k MT, 381.4k MT and 382.7k MT respectively. Production in July19 rebounded after a drop in the previous month, as workers returned after the Hari Raya Aidilfitri holiday. We expect production to continue to increase for the next few months and peak in 4Q19. Overall, Malaysia’s CPO production for 7M19 was up by 10.6% yoy to 11.5m MT, underpinned by improving FFB yields and CPO oil extraction rates. We expect Malaysia’s 2019 CPO production to rebound to c.20m MT from 19.5m MT in 2018 (Oil World forecast for Malaysia’s CPO production in 2019: 20.3m MT).

Exports of Palm-oil Products Increased by 7.4% Mom to 1.49m MT

Palm-oil exports in July19 increased by 7.4% mom to 1.49m MT, mainly attributable to India, Pakistan and Iran buying more of Malaysian palm-oil products. Exports to India, Pakistan and Iran increased by 7.6%, 5.8% and 14.5% mom respectively, to 455.8k MT, 81.1k MT and 71.7k MT. The increase in palm-oil exports in July19 could be due to the resumption of buying after the Hari Raya celebration in June19. For 7M19, total exports rose by 15.2% yoy to 10.9m MT.

Stock Level Declines for the Fifth Month to 2.39m MT

Malaysia’s palm-oil inventory in July19 declined for the fifth straight month, down by c.19.1k MT mom (or -0.8%) to 2.39m MT (record high of 3.2m MT was recorded in Dec18). This was the lowest inventory level since July18, and we think this was partially attributable to an increase in palm-oil product exports as well as consumption.

CPO ASP in July Was at RM1,879/MT (-4.5% Mom)

The average MPOB locally-delivered CPO price in July19 declined to RM1,879/MT, lower by RM89/MT or -4.5% mom (July18 CPO ASP: RM2,215/MT), while the 7M19 CPO price averaged at RM1,977/MT vs. RM2,393.50/MT for 7M18. In our view, the weak prices in 7M19 were partly due to the ample supply of other edible oils in the market, weak market sentiment as well as the trade tension between the US and China.

CPO Price Rises Above RM2,000/MT in August

We still expect the global palm-oil inventory to gradually decline going forward with higher exports and higher consumption of palm-oil products. Stronger exports and consumption will likely be supported by the energy and food sectors, in our view. Malaysia’s biodiesel exports increased by 35.4% yoy to 367k MT in 7M19 (Oil World forecast for Malaysia’s biodiesel production in 2019: 1.37m MT, +25.7% yoy).

Neutral Conditions Have Returned

Based on the US NOAA climate advisory report, El Niño has transitioned to ENSO-neutral (neither El Niño or La Nina is present), which could potentially continue through the Northern Hemisphere winter 2019-20E (c.50-55% probability). The El Niño-Southern Oscillation (ENSO) cycle can greatly influence global weather, as it can alter the normal weather patterns and surface temperatures, which can cause major disruption to the world’s agricultural production and supply.

Maintaining Our NEUTRAL Call on the Sector; Stay Selective

Across our coverage, we have BUY ratings on Ta Ann, IJM Plantations, Hap Seng Plantations and WTK; HOLD ratings on FGV, IOI Corp, SD Plantation, Genting Plantations and KL Kepong; and a SELL rating on Jaya Tiasa (please refer to the peer comparison table on the first page). For plantation-sector exposure, we still prefer Ta Ann for its good plantation earnings prospect, given its rising matured planted area and improving FFB yield and CPO oil extraction rate.

Key Risks for the Plantation Sector

Key downside risks to our NEUTRAL rating on the plantation sector and stock calls include: (i) weaker-than-expected demand and higher-thanexpected production lowering the prices of vegetable oils; (ii) a decline in CPO production that is not offset by higher CPO selling prices; (iii) delays in the implementation of biodiesel mandates in Indonesia and Malaysia; and (iv) unfavourable policies and taxes. Meanwhile, key upside risks include a strong rebound in the global economy as well as the demand for and prices of vegetable oils.

Source: Affin Hwang Research - 14 Aug 2019