Malaysia’s palm-oil inventory in May20 dipped slightly by 0.5% mom 2.03m MT, as total consumption exceeded production. For 2020, we expect stock levels to rise as demand from the food industry and energy sectors are affected by the Covid-19 pandemic and volatile crude-oil prices, thus impacting CPO prices. Notwithstanding the weak 2020 plantation sector outlook, there was a broad recovery in plantation companies’ share prices in recent weeks. This is partly attributable to the improved investor sentiment, ample market liquidity as well as tracking a recovery in global equity indices, in our view. We have revise our valuation metrics and target prices for the plantation companies under our coverage, and upgrade the sector to Neutral (from Underweight). Ta Ann is our top pick for the sector.

CPO Production in May20 Was Flattish Mom at 1.65m MT

Malaysia’s CPO production in May20 was flattish mom at 1.65m MT (-0.1% mom and -1.2% yoy) as production was lower in Peninsular Malaysia, down 7% mom to 869.7k MT, but was partially offset by higher production in Sabah and Sarawak. CPO production in Sabah and Sarawak increased by 13.3% and 3.3%, respectively to 451.7k MT and 329.9k MT. The flattish production could potentially be due to the fasting and Hari Raya celebration, which occurred in May 2020. For 5M20, Malaysia’s CPO production contracted 13.5% yoy to 7.16m MT, mainly due to the weaker production in 1Q20. We believe production will continue to pick up towards 3Q as the lagged effect of dry weather (from 2019) normalises. For 2020, we expect Malaysia’s CPO production to be lower, potentially down by c.2-3% yoy (2019: 19.9m MT), due to the movement control order (MCO) that has partially disrupt harvesting, lagged effect of the dry weather in 2019, lagged effect of lower fertilizer application and minimal new plantings of oil palms.

Improved May Exports, Potentially Due to Restocking

Malaysia’s palm-oil exports in May20 improved by 10.7% mom to 1.37m MT, driven by key buyers China, Pakistan, Bangladesh and India. Exports to China, Pakistan, Bangladesh and India were up by 13.3%, 56.6%, >100% and >100% mom, respectively to 225.9k MT, 97.1k MT, 96.4k MT and 55k MT. However, Malaysia’s total exports in 5M20 declined by 23.9% yoy to 6.1m MT. We believe some countries could be restocking edible oils as their lockdowns ease. Overall, less gatherings/events, higher unemployment levels and lower disposable income could potentially lead to lower yoy consumption of global edible oils in 2020, in our view, and this would have an impact to Malaysia’s palm-oil exports.

Source: Affin Hwang Research - 11 Jun 2020