• Malaysia’s palm-oil inventory in Feb21 declined to 1.3m MT, down 1.9% mom, due to lower imports
• We expect CPO production to recover from Mar21 onwards as the weather normalises after the seasonal monsoon, and the inventory level to gradually rise as well; these factors could have a bearish impact on CPO prices, which we expect to be in a range of RM3,300-3,900/MT in Mar21
• We keep our NEUTRAL rating on the sector and our 2021 CPO assumption of RM2,650-2,700/MT, with IJMP and Ta Ann as our top picks

CPO Production in Feb21 Was at 1.11m MT, Down 1.9% Mom

Malaysia’s CPO production in Feb21 was slightly lower at 1.11m MT, down 1.9% mom, as largely expected. We believe the mom drop in production could be partly due to fewer working days in Feb21 as well as some preventive measures being undertaken at estates (testing of workers) against the spread of Covid-19 that were partially offset by a crop recovery especially at estates in Peninsular Malaysia. Production was higher in the Peninsular by 7% mom to 623.3k MT, while that in Sabah and Sarawak were down by 12.3% and 10.4% mom, respectively, to 230.8k MT and 251.5k MT. Production for Mar21 could improve mom, in our view, after the low base in Feb21 and as weather conditions improve after the monsoon season and La Nina phenomenon. For 2021, we expect Malaysia’s CPO production to be higher, potentially up 2-4% yoy (2020 CPO production: 19.14m MT), mainly due to better weather conditions after the lagged effect of the dry weather in 2019 which affected palm-oil production in 2020.

Weaker Mom Exports, Down 5.5% to 895.6k MT

Malaysia’s Feb21 palm-oil product exports fell by 5.5% mom to 895.6k MT, as predicted, given that some of the main buyers like China, Pakistan and Turkey bought less. Exports to China, Pakistan and Turkey were down by 26.1%, 45.7% and 52.4% mom, respectively, to 84k MT, 22.6k MT and 22.9k MT. These are the lowest monthly exports since Feb07 and we believe the weakness was partly attributable to buyers slowing down their purchases given the high CPO prices as well as the reinstatement of the Malaysian export tax from 1 Jan 2021. We believe exports could improve in Mar21/Apr21 ahead of the Ramadhan month, which starts in mid-Apr21. For 2021, we expect demand for palm-oil products to be higher yoy after being negatively impacted by global lockdowns and closure of HORECA (Hotels/ Restaurants/ Catering) businesses especially in 1H20 (during the early months of the Covid-19 pandemic).

Inventory Level at 1.3m MT, Lowest Since Apr09

Malaysia’s palm-oil inventory in Feb21 declined by 23.8k MT (or -1.8%) mom to 1.3m MT, contrasting with our earlier expectation for an increase to 1.5m MT, due mainly to lower-than-expected imports. This was the lowest level of inventory since Apr09 (1.29m MT). We anticipate palm oil stocks to gradually recover with the seasonal increase in CPO production from Mar21, after the monsoon season.

CPO Prices Averaged at RM3,895.50/MT in Feb21, Up 3.9% Mom

The average MPOB locally-delivered CPO price in Feb21 stood at RM3,895.50/MT, up 3.9% mom (Feb20 CPO ASP: RM2,714.50/MT). Malaysia’s 2M20 CPO price averaged at RM3,831.50/MT. We expect CPO production to recover from Mar21 onwards as the weather normalises after the seasonal monsoon and the inventory level to gradually rise as well; these factors could have a bearish impact on CPO prices, which we expect to trade at RM3,300-3,900/MT in Mar21.

Weather: Potential Transition to ENSO-neutral in 2Q

Based on the US NOAA climate advisory report, there is a 95% chance that La Nina conditions will last through the winter, with a 60% chance for transition to ENSONeutral during the spring of 2021 (April-June). The ENSO cycle can greatly influence the global weather, which can cause major disruptions to the world’s agricultural production and supply. La Nina would mean more rainfall in Southeast Asia, potentially slowing down the harvesting process due to the wet weather phenomenon. A severe La Nina phenomenon could adversely impact production in early 2021, but on the other hand, CPO prices could remain high due to the reduction in production.

Maintain NEUTRAL Rating on the Plantation Sector

Overall, we remain NEUTRAL on the plantation sector. We see pockets of opportunities in the short term supported by the high CPO price environment. Across our coverage, we have BUY ratings on Ta Ann, Jaya Tiasa, IJM Plantations, Genting Plantations, IOI Corp and Hap Seng Plantations; and HOLD ratings on KL Kepong, FGV and SD Plantation. Our top picks for the sector are IJM Plantations and Ta Ann, given their improving earnings prospects with rising FFB and CPO production (on the increase in matured hectarage). We have HOLD ratings on the larger-cap companies given their quality attributes, which lend support to their rich valuations.

Key Risks for the Plantation Sector

Key risks to our NEUTRAL rating on the sector include: (i) stronger/weaker-thanexpected demand and lower/higher-than-expected production affecting the prices of vegetable oils; (ii) stronger/weaker-than-expected exports of palm-oil products; (iii) stronger/weaker-than-expected biodiesel production especially in Indonesia and Malaysia; and (iv) changes in policies and taxes.

Source: Affin Hwang Research - 11 Mar 2021