Reiterate OVERWEIGHT on the plantation sector with unchanged CY20E CPO price of RM2,700/MT. In MPOB’s R&O Seminar 2020, forecasters were generally less optimistic on CPO price at current levels, with Dr James Fry forecasting CPO price to range between RM3,000-3,100/MT in the next 2-3 months, 1HCY20: RM3,000/MT and 2HCY20: RM2,750-2,800/MT, implying CY20: c.RM2,888/MT. Meanwhile, Dr Ahmad Parveez (MPOB) forecasted CY20 CPO price to average RM2,750/MT. Having said that, our CY20 price forecast of RM2,700/MT remains intact given significant buffer from current levels. MPOB forecasted CY20 CPO production of 20.2m (+1.7% YoY), and exports of 18.0m MT (-2.5% YoY), resulting in inventory levels of 2.3m MT (14.4% YoY). We think this is optimistic given our view of a compounding drag effect on CPO production from lower fertiliser application and lower replanting activities, on top of the impact of dry weather. Additionally, despite EU’s biofuel policy and anticipated increase in soybean demand from China (following phase one trade deal), CPO demand remains robust given: (i) Indonesia’s B30 and Malaysia’s B20 mandates, which should negate the negative impact from EU, and (ii) potential increase in palm oil demand from China of over 1.5m MT (over 5 years) with the revival of the ECRL project. On India’s recent import curbs, should Indonesia fulfil India’s CPO demand, it should be at the expense of Indonesia’s refined palm oil exports to other countries. Malaysia could then benefit by filling the refined palm oil (higher value) void. In essence, the demand-supply dynamics remain favourable to CPO. While we concur with the general view of a near-term correction in CPO price, we are unperturbed as it would also restore CPO’s competitive edge over its rival oils. Any weaknesses in planters’ share prices could serve as buying opportunity. We continue to favour GENP (OP: TP: RM12.10) and KLK (OP; TP: RM32.90).

MPOB’s R&O Seminar 2020. We attended the Review and Outlook (R&O) Seminar 2020 organised by Malaysian Palm Oil Board (MPOB) at Sheraton Imperial Hotel in Kuala Lumpur last week. The event was well attended, with c.400 participants from across the global oils and fats industry. We returned maintaining a positive stance on the industry’s prospects with our CY20 CPO price forecast of RM2,700/MT still intact.

Forecasters were generally less optimistic on CPO price at current levels. During the seminar, the general view was that CPO price’s rally has been too sharp and there should be a period of correction. According to Dr James Fry (Chariman of LMC International), CPO’s sharp rally cost it its competitive edge (in terms of price) over rival oils and it would be difficult for CPO price to go above RM3,300/MT in 1HCY20 without higher crude oil prices as CPO price is now trading near the top of the price band. He forecasted CPO price to range between RM3,000-3,100/MT in the next 2-3 months, averaging RM3,000/MT for 1HCY20 and RM2,750- 2,800/MT for 2HCY20, which implies 2020 CPO price of c.RM2,888/MT. Meanwhile, Dr Ahmad Parveez (Director General of MPOB) forecasted CPO price to average RM2,750/MT in 2020. We concur with the general view that CPO price is likely to correct in the near term, especially given the downwards slope seen in CPO’s forward curve towards the c.RM2,800-2,900/MT level

(refer to exhibit 1). Having said that, we believe our CY20 average of RM2,700/MT is still intact as there is significant buffer from current levels. Additionally, we expect weak production (from dry weather impact, lower fertiliser application and lower replanting activities) to also lend support to CPO prices. Other notable views from Dr James Fry includes India’s recent import curbs on refined palm products would mean an increase in Indonesia’s CPO exports to India (should Indonesia fulfil India’s demand), while reducing its exports of refined palm oil. This in his view, and we concur, could be a blessing in disguise for Malaysia’s downstream players as Malaysia could benefit by filling the refined palm oil (higher value) void.

MPOB inventory forecast. For 2020, Dr Ahmad Parveez of MPOB forecasted CPO production to increase to 20.2m MT (+1.7% YoY), and exports to decline to 18.0m MT (-2.5% YoY), resulting in inventory level of 2.3m MT (14.4% YoY). We believe MPOB’s production forecast of 20.2m MT is optimistic given our view that lower fertiliser application and replanting activities during 2018- 2019, on top of the impact of dry weather in June-October 2019 is anticipated to exert a compounding drag effect to CPO production.

CPO demand still remains robust. According to Mr UR Unnithan (President of Malaysian Biodiesel Association), around 3.5-4.0m MT of EU’s palm oil imports are used for biofuels. Given EU’s biofuel policy which limits palm oil consumption for biofuel (eventually phasing out by 2030), palm oil exports to EU should see a similar declining trend. Nonetheless, we believe that with Indonesia’s B30 and Malaysia’s B20 mandates (which should consume an additional c.3.5m MT of CPO), the negative impact from EU should be negated. Meanwhile, demand for soybean should increase following the phase one trade deal between U.S. and China, which could impact China’s existing palm oil demand. However, with the revival of the ECRL project, we could potentially see additional palm oil demand from China of over 1.5m MT (spread over 5 years) to be part of the deal.

Reiterate OVERWEIGHT on the plantation sector with an unchanged CY20 CPO price forecast of RM2,700/MT. While we concur with the general view that CPO price is likely to correct slightly in the near term, we are unperturbed as it would restore CPO’s competitive edge over its rival oils. Thus far, the demand-supply dynamics remain favourable to CPO and we underscore that any weaknesses in planters’ share price could serve as buying opportunity. Among our coverage, we continue to favour:

(i) GENP (OP: TP: RM12.10) due to its upstream exposure (c.45%), allowing it to capitalise on the sharp CPO price rally, while trading at CY20 PER of only c.25x (5% discount to peers), despite having the highest FY20 FFB growth of 4.5% (amongst big caps), and

(ii) KLK (OP; TP: RM32.90) due to its integrated status providing a stable earnings outlook. Despite having above-average FFB growth of 4.3% and superior ROE of 10.4%, KLK is only trading at an undemanding CY20 PER of 24x (9% discount to peers). Additionally, we note that KLK has seen its first increase in foreign shareholding (as of 3-Dec-2019) after 6 consecutive months of decline, which could indicate returning buying interest.

Source: Kenanga Research - 20 Jan 2020