May 2020’s flat (-0.5% MoM) inventory of 2.03m MT came below both our/consensus’ estimate of 2.25m MT (+10% MoM) mainly due to: (i) lower-than-expected production (-0.1% MoM), and (ii) higher-than-expected domestic consumption (+108.7% MoM). We had under-estimated the boost in domestic consumption from: (i) the month of Ramadan, and (ii) the CMCO taking effect which enabled most economic sectors to resume operations. For June, we forecast: (i) increase in production (+5.3% MoM) to 1.74m MT as trees continue recovering after prolonged stress, (ii) increase in exports to 1.50m MT (+9.8% MoM) on the back of recovery in global consumption, resumption of Indian palm oil demand (200k MT contracted over June-July), and 0% palm oil export tax. Corroborative of our view, planters with estates primarily in Malaysia believe we should experience a “mini-peak” production in May-June 2020, while data from cargo surveyor (AmSpec) suggests an increase of 59.5% MoM in export data (1st – 10thJune).All-in, weexpect totaldemand(1.78m MT) to offset total supply (1.78m MT) leading to flat ending stocks of 2.04m MT (+0.3% MoM) in June. We caution on the risk to rising inventory as production enters peak season in 2HCY20. Due to the recent CPO price rally, current SBO-CPO spread has narrowed to c.USD57/MT(vs. May 2020 average ofUSD99/MT), reducing CPO’s competitive edge against its rivaloils.Stay NEUTRALon the plantation sectorwhile our CY20 CPO price forecast of RM2,300/MT remains.For exposure to the sector, weadvocatebashed down namessuch asHSPLANT (OP; TP: RM1.85)andTAANN (OP; TP: RM2.90),both trading at-1.0to -1.5SD valuation, with estates primarily in Malaysia – reaping the full benefits from the 0% palm oil export tax.

May 2020 CPO inventory flat (-0.5%) MoM at 2.03m metric tons (MT). May stockpile surprised us as it came below both our/consensus’ estimate of 2.25m MT (+10% MoM) respectively. The deviation mainly stemmed from: (i) lower-than-expected production (-0.1% MoM) vs. our estimated (+2.7% MoM), and (ii) higher-than-expected domestic consumption (+108.7% MoM) vs. our estimated (+31.6% MoM). We had under-estimated the boost in domestic consumption from: (i) the month of Ramadan, and (ii) as CMCO took effect which enabled most economic sectors to resume operations. Meanwhile, exports registered an increase (+10.7% MoM) lifted by: India (+217.1% MoM), China (+13.3% MoM), Pakistan (+56.6% MoM), Egypt (+194x), and Others (+7.7% MoM). Note that the increase in exports mainly came from Muslim countries, in-line with the Ramadan month.

Forecasting June 2020 production to increase (+5.3% MoM) to 1.74m MT as trees continue their recovery. Under normal circumstances, after three consecutive monthly production output increase, trees typically take a breather with 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 consider May’s flat production as a breather and expect June production to continue its trajectory north. From what we understand, our view is in-line with planters. Most planters (especially those with estates primarily in Malaysia) believe that we should see a “mini-peak” production in May-June 2020.

Exports are expected to rise further to 1.50m MT (+9.8% MoM) in June 2020. While exports typically dip during the month of June as buying frenzy dissipates post Ramadan, we forecast June exports to increase further (+9.8% MoM) to 1.50m MT. This is on the back of a few factors such as: (i) reopening of economies post-containment of the virus, (ii) reported 200k MT palm oil purchase by India to be delivered in June-July, and (iii) 0% palm oil export tax for Jun-Dec 2020 (making Malaysian palm oil more competitive than Indonesia). Data from cargo surveyors (AmSpec) for 1st – 10th June have shown an increase in exports of 59.5% MoM, corroborating our view. On the other hand, we expect domestic consumption to dip (-17.0% MoM) to 274k MT, a post-Ramadan after-effect.

June 2020 inventory to remain flat (+0.3% MoM) at 2.04m MT. All-in, we expect total demand of 1.78m MT matching total supply of 1.78m MT, leading to flat ending stocks of 2.04m MT in June. While this period may offer a brief relief to CPO price, we caution of the risk to rising inventory as production enters peak season in 2HCY20. Furthermore, due to the recent CPO price rally, the current soybean oilpalm oil (SBO-CPO) spread has narrowed to c.USD57/MT (vs. May 2020 average of USD99/MT), potentially challenging CPO’s competitive edge against rival oils.

Stay NEUTRAL on the plantation sector with CY20 CPO price forecast of RM2,300/MT. For investors seeking exposure to the sector, we recommend taking position in bashed down names like HSPLANT (OP; TP: RM1.85) and TAANN (OP; TP: RM2.90) which are both trading at -1.0 to -1.5SD valuation and with estates primarily in Malaysia – reaping the full benefits from the 0% palm oil export tax.

Source: Kenanga Research - 11 Jun 2020