Malaysia’s Oct19 CPO production declined by 2.5% mom and 8.6% yoy to 1.8m MT, while exports climbed by 16.4% mom to 1.64m MT, partly due to stronger demand from China and the EU. Given that demand (exports combined with local consumption) for palm-oil products in Oct19 was higher than production, inventory declined to 2.35m MT (-4.1% mom). We believe the anticipation of higher demand growth rate for palm-oil products vis-à-vis production has boosted CPO prices. We maintain our Neutral rating on the plantation sector and our CPO ASP assumptions for 2019-20E at RM2,050/MTRM2,300/MT. Ta Ann is our preferred sector pick.

10M19 CPO Production Is Up by 7% Yoy to 17m MT

Malaysia’s CPO production in Oct19 was lower at 1.8m MT, down 2.5% mom and 8.6% yoy. CPO production dropped throughout Peninsular Malaysia, Sabah and Sarawak, by 12.2%, 6.4% and 2.9% mom to 887k MT, 476k MT and 432.9k MT, respectively. We believe production is likely to slow down further in the next few months given the monsoon season. Overall, Malaysia’s CPO production for 10M19 was up by 7.1% yoy to 17m 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 and 2020: 20.2m MT).

Stronger Exports of Palm-oil in Oct19, Fuelled by China and the EU

Palm-oil exports in Oct19 strengthened mom, up by 16.4% to 1.64m MT. This was due to higher demand from China, Turkey and the EU. Exports to China, Turkey and the EU increased by 23.8%, >100% and 43.9% mom respectively, to 275.4k MT, 82.1k MT and 200.9k MT. For 10M19, total exports rose by 14.1% yoy to 15.7m MT.

Stock Level in Oct19 at 2.35m MT, Unexpectedly Lower Mom

Malaysia’s palm-oil inventory in Oct19 declined unexpectedly by 100.5k MT mom (or -4.1%) to 2.35m MT, partly due to the lower production and higher-than-expected demand for palm-oil products. Should demand for Malaysia’s palm-oil products remain strong, the inventory level could fall further and aid CPO prices, in our view.

CPO Prices Averaged RM2,104/MT in Oct19, Relatively Flat Mom

The average MPOB locally-delivered CPO price in Oct19 was relatively flat at RM2,104/MT, +0.3% mom (Oct18 CPO ASP: RM2,082/MT), while 10M19 CPO prices averaged RM2,008.50/MT vs. RM2,303.50/MT for 10M18. In our view, the lower prices in 10M19 as compared to the same period a year ago was 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.

November CPO Prices Above RM2,350/MT

Overall, we remain optimistic over the palm oil demand-supply dynamics. We expect the global palm-oil inventory to gradually decline yoy from 2020 onwards 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 23.8% yoy to 490k MT in 10M19 (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 end-2020 (from B10 currently), while Indonesia is targeting B30 (from B20 currently) by Jan20. We believe the anticipation of a higher demand growth rate for palm-oil products as compared to the production growth rate has boosted CPO prices and negated any concerns over an import ban by India. CPO prices in the first 10 days of November have stayed above RM2,350/MT. We maintain our CPO ASP assumptions for 2019-20E at RM2,050/MTRM2,300/MT.

Neutral Weather Conditions

Based on the US NOAA climate advisory report, the tropical Pacific has remained ENSO-neutral (neither El Nino or La Nina is present), and this condition could potentially continue through the Northern Hemisphere spring 2020 (c. 55-60% 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; 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 (please refer to the peer comparison table on the first page). For small-mid cap plantationsector 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 a 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 - 12 Nov 2019