In tandem with the peak production period, Malaysia’s Sep19 CPO production increased further by 1.1% mom to 1.84m MT. Meanwhile, exports declined by 18.8% mom to 1.41m MT, partly due to lower demand from India after normalization of import duties beginning Sep19. As such, Malaysia’s palm-oil inventory level increased to 2.45m MT in Sep19 (+ 9.3% mom). Overall, we maintain our Neutral rating on the plantation sector and our CPO ASP assumption for 2019-20E at RM2,050/MT-RM2,300/MT. Ta Ann is our preferred sector pick.

9M19 CPO Production Is Up by 9.3% to 15.2m MT

Malaysia’s CPO production in Sep19 rose for the third straight month, up by 1.1% mom to 1.84m MT, due to higher production in Sabah (+9.6%) and Sarawak (+5.3%) but partially offset by lower production in Peninsular Malaysia (-4.2%). Production is set to further increase over the next 1-2 months and peak in Oct-Nov, prior to the monsoon season. Overall, Malaysia’s CPO production for 9M19 was up by 9.3% yoy to 15.19m 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: 20.5m MT and 2020: 20.3m MT).

Weaker Exports of Palm-oil Products in Sep19 as Expected

Palm-oil exports in Sep19 weakened mom, declining by 18.8% to 1.41m MT. This was largely expected as the drop in exports was partly due to the largest buyer, India, purchasing less of our palm-oil products in Sep19 following the increase in tax on refined palm oil from Malaysia to 50% from 45%, which started in Sep19. Exports to India, China and the EU dropped by 43.6%, 25% and 5.2% mom respectively, to 310.6k MT, 222.5k MT and 139.6k MT. For 9M19, total exports rose by 15.4% yoy to 14.02m MT.

Stock Level in Sep19 at 2.45m MT, Higher Mom

Malaysia’s palm-oil inventory in Sep19 increased for the first time after six consecutive months of mom declines, up by c. 207.7k MT mom (or +9.3%) to 2.45m MT. The increase in the palm-oil inventory level was expected due to slower demand from our top buyers in Sep19, especially from India. Malaysia’s palm-oil inventory could potentially rise in the next few months, in our view, as we enter the peak production period, although it is unlikely to reach the record high level of 3.2m MT recorded in Dec18.

CPO Prices in Sep19 Averaged at RM2,097/MT (+1.5% Mom)

Average MPOB locally-delivered CPO prices in Sep19 increased slightly by 1.5% mom to RM2,097/MT (Sep18 CPO ASP: RM2,177.50/MT). 9M19 CPO prices averaged at RM1,997/MT vs. RM2,338/MT for 9M18. In our view, the lower prices in 9M19 as compared to 9M18 were 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.

October CPO Prices Still Hovering Near RM2,100/MT

Overall, we remain optimistic in terms of palm-oil demand-supply dynamics. We expect yoy 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 38.5% yoy to 469k MT in 9M19 (Oil World forecast for Malaysia’s biodiesel production in 2019: 1.3m MT, +19.3% yoy). Malaysia targets to raise its biodiesel mandate to B20 by 2020 (from B10 currently), while Indonesia will rise to B30 (from B20 currently) by early- 2020. We maintain our CPO ASP assumption for 2019-20E at RM2,050/MT-RM2,300/MT.

Neutral Weather Conditions

Based on the US NOAA climate advisory report, the tropical Pacific has remained ENSO-neutral (neither El Nino nor La Nina is present), and this condition could potentially continue through the Northern Hemisphere fall 2019 (c. 75% 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; be Selective

Sector-wise, we maintain our NEUTRAL rating. 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. For small-mid cap plantationsector exposure, we still prefer Ta Ann for its good plantation earnings prospects, 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 Oct 2019