• Malaysia’s palm-oil inventory in Apr21 increased by 7.1% mom to 1.55m MT given the total increase in CPO production throughout Peninsular, Sabah and Sarawak outweighing total consumption
• We expect CPO production to continue to increase gradually towards 2H21 as weather normalises after the seasonal monsoon 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 Apr21 Rose 7% Mom Tor 1.52m MT

Malaysia’s CPO production in Apr21 increased by 7% mom to 1.52m MT. This is the highest monthly CPO production since Nov20 as weather conditions continued to improve after the monsoon season and La Nina phenomenon adversely impacted production. Production was higher in Peninsular, Sabah and Sarawak by 3.7%, 16.7% and 6.4% mom, respectively to 852.2k MT, 349.9k MT and 320.8k MT. We expect CPO production to continue to be on a rising trend and to potentially peak in Sep21-Oct21. For 2021E, we expect Malaysia’s CPO production to be higher yoy, 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 palmoil production in 2020.

Highest Monthly Exports for This Year, Up 12.6% to 1.34m MT

Malaysia’s Apr21 palm-oil product exports increased by 12.6% mom to 1.34m MT given that some of our buyers like China, India and Turkey bought more of our products. Exports to China, India and Turkey were higher by 52.8%, 52.7% and 7.5% mom, respectively to 111.1k MT, 354.6k MT and 88.6k MT. This is the highest monthly exports for this year and we believe the increase in palm-oil product exports was partly attributable to stocking up for the Ramadhan month and Hari Raya celebration in Apr21-May21. 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 1.55m MT, Higher Mom

Malaysia’s palm-oil inventory in Apr21 increased further by 102.1k MT (or +7.1%) mom to 1.55m MT, the highest stock level since Nov20, as production outweighed total consumption.

CPO Price Averaged at RM4,220/MT in Apr21, Up 4.4% Mom

The average MPOB locally-delivered CPO price in Apr21 stood at RM4,220/MT, up 4.4% mom (Apr20 CPO ASP: RM2,299/MT). Malaysia’s 4M21 CPO price averaged at RM4,019.50/MT vs RM2,551/MT in 4M20. It has been very volatile for the vegetable oil and oilseed markets over the past few months. Some of the bullish factors supporting edible oil prices include lower-than-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) as well as tight stocks for oilseed and vegetable oils at most countries. On the other hand, there are several bearish factors that could impact price-making in the medium term, including recovery in palm-oil production, recovery in global production of oilseeds and vegetable oils, and potential slowdown in consumption given the steep increases in prices.

Weather: Transition to ENSO-Neutral

Based on the US NOAA climate advisory report, a likely 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 - 11 May 2021