March 2020 inventory rose (+1.7% MoM) to 1.73m MT, marking the first increase after five consecutive monthly declines. The inventory figure came within our estimate of 1.71m MT* (+0.8% MoM) but above consensus’ estimate of 1.67m MT* (-1.9% MoM). Note that these figures* have been adjusted to reflect MPOB’s correction of its ending inventory for February (from 1.68m MT to 1.70m MT). Exports came in at 1.18m MT (+9.2% MoM), within our estimate of 1.15m MT, lifted by demand from: (i) EU (+28.7% MoM), Pakistan (+43% MoM), and Others (+13.7% MoM). For April, we forecast: (i) flat production (+0.2% MoM) at 1.40m MT as recovery should be negated by Sabah’s suspension of plantation operations, and (ii) further easing of exports (-9.3% MoM) as demand remain subdued (COVID-19 led) and as logistic chains remain disrupted from lockdown such as in India and EU. Based on cargo surveyors’ (AmSpec, Intertek) data, exports (1st – 10th Apr) have shown a decline of 9.6% MoM. All-in, we expect total supply (1.43m MT) to overshadow total demand (1.33m MT) leading to a spike in ending stocks to 1.83m MT (+6.1% MoM) in April. Meanwhile, our in-house economist and Oil & Gas analyst forecast crude oil price to average at USD40/brl in 2020, inferring further recovery (+c.26%). In the same way CPO price plummeted >RM200/MT (c.10%) in a single day following crude oil’s nosedive (>30%), we anticipate CPO price and other vegetable oils to track crude oil’s expected recovery. Stay NEUTRAL on the plantation sector with an unchanged average CY20 CPO price forecast of RM2,550/MT on grounds that CPO supply demand tightness remains relatively intact. For investors seeking exposure to the sector, we recommend taking position in bashed down names like HSPLANT (OP; TP: RM1.65) which is trading at near -2.0SD valuation level.

March 2020 CPO inventory rose 1.7% MoM to 1.73m metric tons (MT). March stockpile was within our estimate of 1.71m MT* (+0.8% MoM) but above consensus’ estimate of 1.67m MT* (-1.9% MoM). Note that we adjusted our/consensus’ estimates to reflect MPOB’s correction of its ending inventory for February (from 1.68m MT to 1.70m MT). This marked the first increase after five consecutive monthly decline in stockpiles. March production rose (+8.4% MoM) to 1.40m MT, spot on with our estimate. Meanwhile, exports came in at 1.18m MT (+9.2% MoM) lifted by: (i) EU (+28.7% MoM), Pakistan (+43% MoM), and Others (+13.7% MoM), which was also within our estimate of 1.15m MT.

Forecasting a flat April 2020 production(+0.2% MoM) at 1.40m MT as trees’ recovery after prolonged stress and five consecutive monthly decline should be negated by Sabah’s decision to suspend plantation operations in six districts. Note that the state government has granted conditional approval for palm estates and mills to resume operations on 10 April 2020. While it is still uncertain whether the recovery would continue as the adverse impact on production (from the dry weather, lower fertiliser application and new planting activities) could yet be over, we believe a clearer picture on the production outlook should be visible through April 2020’s production figures.

Exports are expected to decline further to 1.07m MT (-9.3% MoM) in April 2020. Exports to India, China, and EU are expected to remain subdued given the on-going COVID-19 threat and India’s recent lockdown. Accordingly, we are forecasting exports to decline further by 9.3% MoM to 1.07m MT in April 2020. Data from cargo surveyors (AmSpec, Intertek) for 1st – 10th

Apr have shown an average decline in exports of 9.6% MoM, corroborating our view. Nonetheless, backloaded demand from India could be on the cards, considering its depleting oils and fats inventory during the lockdown.

Brace for April 2020 inventory spike to 1.83m MT (+6.1% MoM). All-in, we expect total supply of 1.43m MT to overshadow total demand of 1.33m MT, leading to higher ending stocks of 1.83m MT (+6.1% MoM) in April. Meanwhile, our in-house economist and Oil & Gas analyst forecast crude oil price to average at USD40/brl in 2020, inferring futher recovery (+c.26%). In the same way CPO price plummeted >RM200/MT (c.10%) in a single day following crude oil’s nosedive (>30%), we anticipate CPO and other vegetable oils to track crude oil’s expected recovery. Additionally, the soybean oil-palm oil (SBO-CPO) average spread in Apr 2020 (MTD) has widened to c.USD40/MT (vs. a mere USD5/MT in Jan 2020), which should lend support to CPO price and affirms us that CPO’s competitive edge against its rival oils is returning.

Stay NEUTRAL on the plantation sector on grounds that CPO supply-demand tightness remains relatively intact as the expected decline in demand should be offset by an expected dip in production from a lagged dry weather impact, lower fertiliser application and replanting activities during the depressed CPO environment. Our CY2020 CPO price forecast of RM2,550/MT remains. For investors seeking exposure to the sector, we recommend taking position in bashed down names like HSPLANT (OP; TP: RM1.65) which is trading at near -2.0SD valuation level.

Source: Kenanga Research - 13 Apr 2020