Expect another record-high inventory data for October. We expect the upcoming MPOB data (expected release date on 12-Nov) to be uninspiring as inventory is poised to increase further to another record high of 2.65m mt (+7% MoM and +27% YoY) from 2.48m mt in September. Although we expect a good palm oil exports volume of 1.66m mt (+10% MoM but -10% YoY), we believe that the palm oil production level will be much higher at 1.92m mt (-4% MoM but +1% YoY). Overall, the high inventory should keep the CPO price upside limited in the near term.

Low CPO price should keep exports growing at 10% in Oct.  We have assumed an exports growth of 10% MoM in October as the current low CPO price should have encouraged more exports. Note that CPO is trading at a very high discount against soybean oil with an average of US$370/mt in October. This is more than double the 5-year average discount of US$158/mt and we expect this to drive demand from soybean oil towards palm oil. But the high palm oil production of 1.92m mt means that the 10% export growth will still not be enough. We expect CPO production to stay near its peak at 1.92m mt in October, although it should decline slightly by 4% MoM in view of the high rainfalls, which could have affected the harvesting process. The high CPO production is in line with the seasonal factor, with MPOB data showing that CPO production peaked in October in the past three years. 

China and US demands for CPO may improve in line with their better economic data.  China's Purchasing Managers Index (PMI) climbed to 50.2 in October (against 49.8 in September), possibly signaling that its economy has improved after two rounds of interest rate cut in Jun and July this year. In US, the Institute for Supply Management (ISM) manufacturing index has improved slightly to 51.7 in October (against 51.5 in September). We expect CPO demand to increase in tandem with the better economy outlook in these countries. Hence, the CPO price should increase gradually from its current level of RM2,300-RM2,400 once the high inventory level is cleared.

Stay with young planters like TSH and UMCCA.  These players boast average tree age profiles of just 6.2 and 7.6 years old respectively, the youngest among pure planters under our coverage. Due to the double-digit FFB growth prospects for TSH and UMCCA, we expect their earnings to be more resilient than other planters.

Source: Kenanga