• Malaysia’s palm-oil inventory in Mar21 increased to 1.45m MT, up 10.7% mom, due to an increase in CPO production throughout Peninsular, Sabah and Sarawak outweighing total consumption
• We expect CPO production to continue to increase gradually in 2Q21 and beyond as weather normalises after the seasonal monsoons and we anticipate inventory levels to gradually rise as well
• We keep our NEUTRAL rating on the sector with GENP and Ta Ann as our top picks

CPO Production in Mar21 Was at 1.42m MT, Up 28.4% Mom

Malaysia’s CPO production in Mar21 jumped up by 28.4% mom to 1.42m MT. This is the highest monthly CPO production since Nov20 as weather conditions improved after the monsoon season and La Nina phenomenon adversely impacted production. Production was higher in Peninsular, Sabah and Sarawak by 31.3%, 30% and 19.9% mom, respectively to 821.9.3k MT, 299.9k MT and 301.5k MT. We expect CPO production for Apr21 onwards to be on a rising trend and to potentially peak in Sep21- Oct21. For 2021E, we expect Malaysia’s CPO production to be higher, potentially up c. 2-4% yoy (2020 CPO production: 19.14m MT), mainly due to better weather conditions after the lagged effect of dry weather in 2019 which affected palm-oil production in 2020.

Higher Mom Exports Ahead of Fasting Month

Malaysia’s Mar21 palm-oil product exports increased by 31.8% mom to 1.18k MT given that some of our main buyers like India, Iran, Turkey and the EU bought more of our products. Exports to India, Iran, Turkey and the EU was higher by 42%, >100%, >100% and 46.1% mom, respectively to 230.1k MT, 85.4k MT, 82.5k MT and 157.9k MT. This is the highest monthly export figure for this year and we believe the increase in palm-oil product exports in Mar21 was partly attributable to buyers stocking up ahead of Ramadhan month and Hari Raya celebration in Apr21-May21. Thus, we expect exports to potentially improve further in Apr21 for stocking up activities. For 2021E, we expect demand for palm-oil products to be higher yoy after being negatively impacted by global lockdowns and the closure of their HORECA (Hotels/Restaurants/Catering) businesses, especially in 1H20 (during the early months of Covid-19 pandemic).

Inventory Levels at 1.45m MT, Higher Mom

Malaysia’s palm-oil inventory in Mar21 increased by 139.9k MT (or +10.7%) mom to 1.45m MT, the highest stock level since Nov20, as production outweighed total consumption.

CPO Prices Averaged at RM4,041.50/MT in Mar21, Up 3.7% Mom

The average MPOB locally-delivered CPO price in Mar21 stood at RM4,041.50/MT, up 3.7% mom (Mar20 CPO ASP: RM2,382/MT). Malaysia’s 3M20 CPO price averaged at RM3,933/MT. 1Q21 has been very volatile for the edible oil and oilseed markets. Some of the bullish factors supporting the edible oil prices includes lowerthan-expected crop production such as palm-oil and sunflower (due to adverse weather conditions), tightness in supply of rapeseed oil (due to shift from sunflower oil and strong demand from China) and tightness in supply of soybeans (due to planting delays in South America and strong China demand). We may have seen the high in prices and they could potentially be under pressure in 2Q21 onwards as production picks up as weather normalises after the seasonal monsoons and we anticipate inventory levels to gradually rise as well. These factors could potentially have a bearish impact on prices, in our view. Nevertheless, the 2021E CPO ASP could potentially end higher than our assumption of RM2,650-2,700/MT, which is under review.

Weather: Transition to ENSO-neutral in 2Q21

Based on the US NOAA climate advisory report, likely a transition to ENSO-Neutral (neither El Nino or La Nina is present) from La Nina will occur in the next few weeks or so, and the chances of ENSO-Neutral occurring stands at 80% during the spring of 2021 (especially in May-July). The ENSO cycle can greatly influence global weather, which can cause major disruptions to the world’s agricultural production and supply.

Maintain NEUTRAL on the Plantation Sector

Overall, we remain NEUTRAL on the plantation sector with 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 Genting Plantations and Ta Ann, given their improving earnings prospects with rising FFB and CPO production (given 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 - 13 Apr 2021