Malaysia’s Aug19 CPO production increased by 4.6% mom to 1.82m MT, while exports increased by 16.4% mom to 1.73m MT. India remained the top buyer of Malaysia’s palm-oil products in Aug19, partly due to stocking-up activities ahead of the increase in refined palm-oil import duties on Malaysia, starting Sep19. Given the higher palm-oil exports and consumption, the palm-oil inventory level declined for the sixth consecutive month to 2.25m MT in Aug19. We still expect global palm oil inventories to gradually decline with higher exports and higher consumption of palm-oil products going forward, supported by the energy market and food industries. Overall, we maintain our Neutral rating on the plantation sector.

8M19 CPO Production Is Up by 10.8% to 13.35m MT

Malaysia’s CPO production in Aug19 increased by 4.6% mom and +12.4% yoy to 1.82m MT, due to higher production in Sabah and Sarawak. CPO production in Sabah and Sarawak climbed by 4.5% and 17% mom to 399.2k MT and 447.8k MT respectively, while production in Peninsular Malaysia declined slightly by 0.2% to 974.6k MT. We expect production to continue to increase over the next few months and peak in 4Q19, prior to the monsoon season. Overall, Malaysia’s CPO production for 8M19 was up by 10.8% yoy to 13.35m MT, underpinned by improving FFB yields and CPO oil extraction rates throughout Malaysia. 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: 20.4m MT).

Exports of Palm-oil Products Still Strong in Aug19

Palm-oil exports from Malaysia in Aug19 increased by 16.4% mom to 1.73m MT (strongest monthly exports since Aug16), mainly attributable to our top buyers India, China and the EU buying more of Malaysian palm-oil products. Exports to India, China and the EU increased by 22.6%, >100% and 0.3% mom respectively, to 566.2k MT, 308.5k MT and 147.1k MT. The increase in palm-oil exports to India in Aug19 was partly due to the stocking up ahead of the hike in refined palm-oil import duties from Malaysia, which started in Sep19. India raised the tax on refined palm oil from Malaysia to 50% from 45% previously. We believe this is in response to a demand by their domestic refiners to boost their local refining. Since the tax rate has reverted to 50%, and is now comparable to other palm-oil producing countries like Indonesia, exports to India are likely to be lower in Sep19 onwards due to competition, in our view. For 8M19, total exports rose by 19.6% yoy to 12.6m MT.

Stock Level in Aug19 at 2.25m MT, Lowest Since Jul18

Malaysia’s palm-oil inventory in Aug19 declined for the sixth consecutive month, down by c. 126.3k MT mom (or -5.3%) to 2.25m MT (record high of 3.2m MT was recorded in Dec18). This is the lowest inventory level since July18 and the decline was attributable to an increase in palm-oil product exports as well as consumption. We believe there is a risk for Malaysia’s palm-oil inventory to increase in Sep19, partly due to slower demand, especially from India with the increase in import tax recently. A slowdown in sales of palm-oil products could potentially hit FGV the most (among the companies under our coverage), in our view, as they are the biggest CPO producer in Malaysia.

CPO Prices in Aug19 Averaged at RM2,066.50/MT (+10% Mom)

Average MPOB locally-delivered CPO prices in Aug19 increased by RM187.50/MT or 10% mom to an average of RM2,066.50/MT (Aug18 CPO ASP: RM2,183.50/MT). 8M19 CPO prices averaged at RM1,987.50/MT vs. RM2,363.0/MT for 8M18. In our view, the weak price in 8M19 as compared to 8M18 is partly due to the ample supply of other edible oils in the market (especially earlier this year), weak market sentiment as well as the trade tensions between the US and China.

CPO Prices Hovering Near RM2,100/MT

We remain optimistic in terms of palm-oil demand-supply dynamics, expecting global palm-oil inventories 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 market and food industries, in our view. Malaysia’s biodiesel exports increased by 33.4% yoy to 414k MT in 8M19 (Oil World forecast for Malaysia’s biodiesel production in 2019: 1.37m MT, +25.7% yoy). Malaysia targets to raise its biodiesel mandate to B20 by 2020 (from B10 currently), while Indonesia aims for B30 (from B20 currently) by early 2020.

Neutral Weather Conditions

Based on the US NOAA climate advisory report, El Nino has transitioned to ENSO-neutral (neither El Nino nor La Nina is present), which could potentially continue through the Northern Hemisphere winter 2019-20 (c. 50-55% probability). The El Niño-Southern Oscillation (ENSO) cycle can greatly influence global weather, as these cycles 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 and Hap Seng Plantations; HOLD ratings on FGV, IOI Corp, SD Plantation, Genting Plantations, KL Kepong and WTK; and a SELL rating on Jaya Tiasa (please refer to the peer comparison table on the first page). For small/mid-cap 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 prices of vegetable oils; (ii) a decline in CPO production that is not offset by higher CPO ASP; (iii) delays in the implementation of biodiesel mandates; 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 - 11 Sept 2019