• After the rally in CPO prices (c. +19%/+40% over the past one/three months), we caution that there could potentially be a pullback in prices amid pressure from rising stock levels towards 4Q20. 
• Nevertheless, we do not expect prices to revert to YTD lows and thus raise our CPO ASPs assumptions for 2020-21E to RM2,350-2,450/MT from RM2,100-2,250/MT previously. We believe a recovery in demand from both the food sector and biodiesel industry will help to lift CPO prices in 2021E.
• We see the possibility of a pullback in CPO prices reversing the gains in plantation companies’ share prices over the past one to three months. However, sector PE valuations are trading near the past-10-year mean. For sector exposure, we prefer IJM Plantations for its attractive valuation.

Expecting a gradual recovery in demand

The speed of recovery in demand for palm-oil products would depend on the progress of the COVID-19 situation. We could potentially see an improvement in demand for palm-oil products in 2H20 as compared to 1H20 as countries restock their palm-oil supply and with the re-opening of hotels, restaurants and catering establishments (HORECA businesses). Nevertheless, we think demand will not be as strong as in 2H19 as fewer gatherings/events, higher unemployment levels and lower disposable income will lead to lower yoy consumption of global edible oils. We believe the global consumption of palm-oil products in 2H20 to potentially be c.38-39m MT, which is higher than 1H20 but lower as compared to 2H19.

Raising CPO assumptions to RM2,350-2,450/MT for 2020-21E

We have seen some price recovery from the low of this year in May 2020 to current levels, partly attributable to the pick-up in demand due to restocking activities, improving consumer sentiment, increase in other vegetable oil prices and weather uncertainties. Nevertheless, we caution that there could potentially be a pullback in prices amid rising stock levels in producing countries and rising concerns on a COVID-19 second wave at key importing countries, but we believe the decline will not revert to the YTD low. We raise our CPO ASPs assumption for 2020-21E to RM2,350-2,450/MT from RM2,100-2,250/MT previously (7M20 ASP: RM2,448.50).

New earnings and TPs for companies under our coverage

Given our higher assumption of CPO prices, we now forecast plantation companies’ 2020/21E earnings to grow by 31.6%/17.2% yoy from -3%/+24.4% previously (excluding Jaya Tiasa which reported huge losses in 2019; 2020/21E earnings to grow by 20.8%/14.4% yoy). We maintain our sector Neutral rating. Under our coverage, we have BUY ratings on Ta Ann, Jaya Tiasa, IJM Plantations and Hap Seng Plantations. We upgrade FGV and SD Plantation to HOLD, joining KL Kepong, Genting Plantations and IOI Corp. For mid-cap plantation-sector exposure, we prefer IJM Plantations for its improving earnings prospects with rising FFB and CPO production coupled with stronger CPO prices.

Weaker CPO demand in 1H20 due to lockdowns

1H20 demand disruption due to COVID-19 and drop in oil prices The disruption in demand for palm-oil products in 1H20 was mainly due to the COVID-19 pandemic and a drop in crude-oil prices. The COVID-19 pandemic affected global food demand partly due to the closure of HORECA businesses, while the drop in oil prices has reduced the price competitiveness of oils & fats for the biofuel industry. According to data from Oil World, global palm-oil product exports in 1H20 declined by 13.2% yoy (or -3.5m MT) to 23.2m MT mainly due to weaker exports to countries like China and India, while global consumption in 1H20 was lower by 5.3% yoy (or -2.1m MT) to 36.9m MT.

Source: Affin Hwang Research - 7 Aug 2020