May 2019 CPO inventory eased 10% MoM to a 10-month low of 2.45m MT, in line with consensus expectation (- 10% MoM to 2.46m MT) but lower than our estimate of 2.56m MT (-6% MoM), attributable to lower-than expected import of CPO and higher-than-expected domestic disappearance/consumption. Meanwhile, CPO production of 1.67m MT (+1% MoM) was broadly within our expectation (+3% to 1.70m MT) but negatively surprised the street, which was projecting output to dip 2% to 1.62m MT. Export volume of 1.71m MT (+4% MoM) aligned with both consensus (+3% MoM to 1.71m MT) and our expectations (+2% MoM to 1.69m MT). For June 2019, we believe production will reverse the growth in May and dip 5% MoM to 1.59m MT due to Eid al-Fitr festivities, while foreseeing exports to decline 15% MoM to 1.45m MT as the buying frenzy from India, the EU and the US dissipates. Overall, we still anticipate total demand of 1.75m MT to outstrip total supply of 1.65m MT in June 2019, leading to lower ending stocks of 2.35m MT (-4% MoM). Reiterate UNDERWEIGHT on the Plantation sector with an unchanged 2019 CPO price target of RM2,000/MT. We believe planters’ earnings will hit a rough patch in coming quarters with CPO prices hovering around current depressed levels, which will likely overshadow any production pick-up in 2H19 – we have accounted for this in our estimates.

May 2019 CPO inventory eased 10% MoM to a 10-month low of 2.45m MT, in line with consensus expectation (-10% MoM to 2.46m MT) but lower than our estimate of 2.56m MT (-6% MoM). The deviation is mainly attributable to: (i) lower-than-expected import of CPO (62k MT vs. our forecast of 96k MT), likely due to narrowing Indonesian-Malaysian CPO price discount, and (ii) higher-than-expected domestic disappearance/consumption (304k MT vs. our forecast of 279k MT) boosted by higher demand during Ramadan.

Meanwhile, CPO production of 1.67m MT (+1% MoM) was broadly within our expectation (+3% to 1.70m MT) but negatively surprised the street, which was projecting output to dip 2% to 1.62m MT.

Export volume of 1.71m MT (+4% MoM) aligned with both consensus (+3% MoM to 1.71m MT) and our expectations (+2% MoM to 1.69m MT). The export growth was largely fueled by: (i) a 43% MoM jump in demand from the EU, likely due to higher discretionary biodiesel blending on a wide CPO-gasoil discount (May 2019 average of USD161/MT vs. USD127/MT in the prior 12 months), and (ii) a more than four-fold demand increase from the US, the highest since November 2011, thanks to a rapid drawdown of Oils and Fats ending stocks in the country (1.65m MT in April 2019 vs. >2m MT throughout 2H18). While export to India only inched up 1% MoM, it continued to take center stage with an all-time high monthly purchase of 529k MT, as the locals possibly continued to take advantage of the reduction in import levy from 44% to 40% in January 2019 as well as the low CPO prices. These were partially offset by a 37% drop in demand from China, normalising from a high base last month.

June 2019 stocks to ease further by 4% MoM to 2.35m MT. We believe production will reverse the growth in May and dip 5% MoM to 1.59m MT in June owing to potential worker shortages during the Eid al-Fitr festivities. On the export front, we expect to see a 15% MoM decline to 1.45m MT as the buying frenzy from India and the US dissipates, while demand from the EU also wanes as CPO-Gasoil discount halved from the average of USD161/MT in May to USD84/MT as at 11 June. Overall (including stable import and domestic consumption movements), we still anticipate total demand of 1.75m MT to outstrip supply of 1.65m MT in June 2019, leading to lower ending stocks of 2.35m MT (-4% MoM).

Reiterate UNDERWEIGHT on the Plantation sector. We believe planters’ earnings will hit a rough patch in coming quarters with CPO prices hovering around current levels, which will likely overshadow any production pick-up in 2H19.

While biodiesel mandates seem to be panning out well (expected to absorb c.13% of CPO production in Indonesia and c.4% in Malaysia), the intensifying US-China trade war tensions are likely to dampen soybean oil prices like what happened last year. In our opinion, this will dwarf any positive trade/demand impact on CPO and keep prices under pressure in the near term, as the two commodities are close substitutes with their prices highly correlated (>0.90). Coupled with a potential inventory pick-up in 2H19 (to 3.0-3.5m MT levels), we believe the possibility of a strong CPO price recovery in the near term can be practically ruled out. As such, we are maintaining our 2019 CPO price target of RM2,000/MT and our UNDERWEIGHT stance on the Plantation sector. Nevertheless, should the Chinese and/or biodiesel demand be stronger-than-expected, resulting in falling stockpiles in 2H19 and a sharp recovery in CPO prices, we would review our sector call and TP of planters under our coverage in our upcoming 3Q19 strategy report.

Source: Kenanga Research - 13 Jun 2019