July 2019 inventory declined 0.8% to 2.39m MT, below consensus’ estimate of 2.47m MT on (i) lower-than expected import of CPO (-63.8% MoM to 37k MT), likely due to the narrowing Indonesia-Malaysia CPO price discount, (ii) higher-than-expected domestic consumption (+17.6% MoM to 309k MT), and (iii) stronger-than expected export volume (+7.4% MoM to 1.49m MT), mainly driven by non-key markets (+24.4%) and India (+7.6%). All-in, we expect supply of 1.90m MT to outstrip demand of 1.86m MT, leading to higher ending stocks of 2.42m MT in August 2019. Maintain UNDERWEIGHT on the plantation sector as we believe planters’ earnings will continue to hit a rough patch in the coming quarter with 2QCY19 average CPO price at RM1,978/MT (YoY: -17.2%; QoQ: -1.3%). No changes to our CY19 CPO price forecast of RM2,000/MT. However, should there be stronger-than-expected demand from China arising from the ban of US agricultural products, resulting in falling stockpiles in the remaining 2H19 and sharp recovery in CPO prices, we would review the call and TP of planters under our coverage.

July 2019 CPO inventory declined 0.8% MoM to 2.39m metric tons (MT), lower than consensus’ expectation of 2.47m MT. The deviation is mainly attributable to: (i) lower than-expected CPO import (MoM: -63.8%; 37k MT vs. consensus’ forecast of 80k MT), likely due to the narrowing Indonesia-Malaysia CPO price discount, (ii) higher-than expected domestic consumption (MoM: +17.6%; 309k MT vs. consensus’ forecast of 280k MT), and (iii) stronger-than-expected export volume (MoM: +7.4%; 1.49m MT vs. consensus’ forecast of 1.44m MT). The strong export volume was mainly driven by non key markets (MoM: +24.4% to 673k MT) and India (MoM: +7.6% to 456k MT), as the local consumption remains strong, as evidenced by the quick drawdown of palm oil inventory from 820k MT in February 2019 to 587k MT in July 2019. However, export to the EU declined (MoM: -20.8%) to 144k MT likely due to falling crude oil prices. Meanwhile, CPO production of 1.74m MT (MoM: +15.1%) was broadly within consensus’ expectation of 1.69m MT.

August 2019 production to grow by 5.2% to 1.83m MT. From our channel checks with planters, due to a change in cropping patterns from the effects of El Nino and La Nina, most of them are expecting to see peak production period in October November. As such, we believe production is on track to pick up in the coming months and we forecast August’s output to increase by 5.2% to 1.83m MT.

Export volume to increase 6.0% MoM. We expect to see a 6.0% MoM increase in export volume to 1.57m MT, fueled by increased demand from: (i) China following the ban on US’ agricultural products, and (ii) India as its palm oil inventory is at its lowest YTD (587k MT). These should be partially offset by a decline in exports to the EU, as narrowing CPO-gasoil discount (currently at c.USD60/MT vs. 1-year average of USD137/MT) is likely to discourage discretionary biodiesel blending.

August 2019 stocks to rise 1.3% to 2.42m MT. We expect supply of 1.90m MT to outstrip demand of 1.86m MT, leading to higher ending stocks of 2.42m MT in August 2019. Thus far, CPO price has recovered from a low of RM1,864/MT in early July due to recent positive developments such as China’s proposed removal of import quota for palm oil, potentially marking its commitment to import more CPO. However, with production likely to pick up and peak in Oct/Nov 2019, we believe this would cap further upside to CPO prices. All-in, we believe CPO price will continue to remain range-bound (RM1,900- RM2,100/MT) in 2H19.

Maintain UNDERWEIGHT on the plantation sector. We believe planters’ earnings will continue to hit a rough patch in the coming quarter with 2QCY19 average CPO price at RM1,978/MT (YoY: -17.2%; QoQ: -1.3%), which should mask any pick-up in production. As such, we are maintaining our CY19 CPO price forecast of RM2,000/MT and our UNDERWEIGHT stance on the sector. However, should there be stronger-than-expected demand from China arising from the ban of US agricultural products, resulting in falling stockpiles in the remaining 2H19 and sharp recovery in CPO prices, we would review the call and TP of planters under our coverage.

Source: Kenanga Research - 14 Aug 2019