April 2020 inventory rose (+18.3% MoM) to 2.05m MT, marking its second consecutive monthly increase. The figure came above both our estimate of 1.84m MT (+6.1% MoM) and consensus’ estimate of 1.91m MT (+10.4%), mainly due to higher-than-expected production (18.3% MoM). Exports registered an increase of 4.4% MoM, lifted by demand from: (i) China (+34.7% MoM), and (ii) Others (+3.9% MoM). For May, we forecast: (i) further increase in production (+2.7% MoM) to 1.70m MT as trees continue recovering after prolonged stress, albeit at a slower pace, (ii) an increase in exports to 1.32m MT (+7.1% MoM) as consumption from countries such as China gradually recovers post-containment of the virus and/or uplifting of lockdowns. A breather in production could be seen in June as production figures have increased 41% from the lows in January (vs. 5-year average: 24%) before the usual peak production period in 2HCY20, while average increase (+9.8% MoM) in export data (1st – 10th May) from cargo surveyors (AmSpec, Intertek) corroborates our view of an increase in May exports. All-in, we expect total supply (1.74m MT) to overshadow total demand (1.53m MT) leading to further swelling of ending stocks to 2.26m MT (+10.3% MoM) in May. Meanwhile, our in-house economist and Oil & Gas analyst’s crude oil price forecast for 2020 remains at USD40/brl in 2020, inferring further recovery (+c.34%) and in the event this occurs, CPO and other vegetable oils could track along. Stay NEUTRAL on the plantation sector while our CY20 CPO price forecast of RM2,550/MT remains for now, ahead of the 1Q reporting season where we are likely to review our estimates with a downside bias. For investors seeking exposure to the sector, we advocate bashed down names like HSPLANT (OP; TP: RM1.65) which is trading at near -2.0SD valuation level.

April 2020 CPO inventory spiked 18.3% MoM to 2.05m metric tons (MT). April stockpile came above both our/consensus’ estimate of 1.84m/1.91m MT (+6.1%/+10.4%). This marked its second consecutive monthly increase. The deviation from our estimate mainly came from greater-than-expected production recovery of (+18.3% MoM) vs. our flat estimate (+0.2% MoM). Meanwhile, exports registered an increase (+4.4% MoM) lifted by: China (+34.7% MoM), and Others (+3.9% MoM).

Forecasting May 2020 production to increase further (+2.7% MoM) to 1.70m MT as trees continue their recovery after prolonged stress. Under normal circumstances, after three consecutive monthly production output increase, tress typically take a breather along with dipping production. This is the case since 2014 except for 2016 (eight consecutive monthly increases) where the El Niño impact was largely felt. Considering that there was also an El Niño event in 2019, albeit a weaker one, we expect May production to continue its trajectory north, even though April production figures marked its third consecutive monthly increase. Having said that, we note that production figures have increased 41% from the lows in January (vs. 5-year average of 24%), inferring that a breather could be in store in the upcoming months, providing the industry a brief relief before the usual peak production period in 2HCY20.

Exports are expected to rise further to 1.32m MT (+7.1% MoM) in May 2020. Exports to India is expected to remain subdued given the on-going COVID-19 threat in the country and the recent suspension of 39 import licenses for refined palm oil. However, the impact is insignificant to Malaysia palm oil export figures as YTD exports to India accounts for only 2% of total exports. On the other hand, we believe that demand from countries such as China should gradually increase as consumption recovers post-containment of the virus or post-uplifting of lockdowns. Accordingly, we are forecasting exports to increase further by 7.1% MoM to 1.32m MT in May 2020. Data from cargo surveyors (AmSpec, Intertek) for 1st – 10th May have shown an average increase in exports of 9.8% MoM, corroborating our view.

May 2020 inventory to swell further to 2.26m MT (+10.3% MoM). All-in, we expect total supply of 1.74m MT to overshadow total demand of 1.53m MT, leading to higher ending stocks of 2.26m MT (+10.3% MoM) in May. Meanwhile, our in-house economist and Oil & Gas analyst’s crude oil price forecast for 2020 remains at USD40/brl in 2020, inferring further recovery (+c.34%). In the event that crude oil recovers to USD40/brl, CPO and other vegetable oils could track along. Currently, the soybean oil-palm oil (SBO-CPO) average spread in May 2020 (MTD) has widened to c.USD110/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 while our CY20 CPO price forecast of RM2,550/MT remains for now, ahead of the 1Q reporting season where we are likely to revise our estimates with a downside bias. 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 May 2020