June inventory of 1.90m MT (-6.3% MoM) came below our estimate of 2.04m MT (+0.3% MoM) but within consensus’ estimate of 1.94m MT (-4.6% MoM). The deviation was mainly due to: (i) higher-than-expected exports (+24.9%), and (ii) higher-than-expected domestic consumption (+5.6% MoM). The increase in domestic consumption came as a surprise as typically consumption dips post Ramadan as an after-effect, while the jump in exports is mainly attributable to two countries – India (+347.7% MoM) and China (+55.6% MoM), which is due to: (i) pent-up demand, (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. For July, we forecast: (i) dip in production (-1.8% MoM) to 1.85m MT after what we believe to be a “mini-peak” in June, (ii) decline in exports to 1.55m MT (-9.4% MoM) as pent-up demand gradually fizzles out. Data from cargo surveyors (AmSpec) for 1st– 10th July have shown a decline in exports of 16.8% MoM, corroborating our view. All-in, we expect total supply of 1.90m MT to more or less equal total demand of 1.90m MT leading to flat ending stocks of 1.91m MT (+0.4% MoM) in July. We anticipate a gradual rise in inventory levels moving forward, as production enters peak season in 2HCY20 which should exert pressure on CPO prices. Additionally, due to the recent CPO price rally, current SBO-CPO spread has narrowed to c.USD50/MT (vs.2-year averageofc.USD109/MT), reducing CPO’s competitive edge against its rival oils.StayNEUTRALon the plantation sector while our CY20 CPO price forecast of RM2,300/MT remains.For exposure to the sector, weadvocate bashed down names such as HSPLANT (OP; TP: RM1.85) and TSH (OP; TP: RM0.950), both being traded at -1.0SD valuation level (vs. peers’ at -0.5 to mean valuation).

June 2020 CPO inventory fell (-6.3%) MoM to 1.90m metric tons (MT). This is below our estimate of 2.04m MT (+0.3% MoM) but within consensus’ estimate of 1.94m MT (-4.6% MoM). Despite higher-than-expected production (+14.2% MoM) vs. our estimate (+5.3% MoM), we severely underestimated: (i) the surge in exports (+24.9% MoM; vs. our +9.8% MoM), and (ii) domestic consumption (+5.6% MoM vs. our -18.2% MoM). The increase in domestic consumption came as a surprise as typically consumption dips post Ramadan as an after-effect. Meanwhile, the jump in exports is mainly attributable to two countries – India (+347.7% MoM) and China (+55.6% MoM), which is due to: (i) pent-up demand, (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. Having said that, we caution on the sustainability of the large exports after stockpiling activities are completed.

Forecasting July 2020 production to dip (-1.8% MoM) to 1.85m MT as trees take a breather. 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. Given the significant spike in June production (+14.2% MoM), we believe we have seen the “mini-peak” and accordingly forecast a slight dip in production. While this period may offer a brief relief to CPO prices, we emphasize on the peak production season that is yet to come.

Expecting exports to decline (-9.4% MoM) to 1.55m MT in July 2020. We believe June’s exports spike was mainly fueled by India and China’s inventory replenishment efforts, alongside the 0% palm oil export tax for Jun-Dec 2020 (making Malaysian palm oil more competitive than Indonesia). Moving forward, we expect pent-up demand to gradually fizzle out, especially as we expect China to ramp up U.S. soybean purchases to honour the U.S.-China phase 1 trade deal. Taking all these into consideration, we forecast exports to decline 9.4% MoM to 1.55m MT in July 2020. Data from cargo surveyors (AmSpec) for 1st – 10th July have shown a decline in exports of 16.8% MoM, corroborating our view.

July 2020 inventory to remain flat (+0.4% MoM) at 1.91m MT. All-in, we expect total supply of 1.90m MT to more or less equal total demand of 1.90m MT, leading to flat ending stocks of 1.91m MT in July. We anticipate a gradual rise in inventory levels moving forward, as production enters peak season in 2HCY20 which should exert pressure on CPO price. In addition, due to the recent CPO price rally, the current soybean oil-palm oil (SBO-CPO) spread has narrowed to c.USD50/MT (vs. 2-year average of c.USD109/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 TSH (OP; TP: RM0.950) which are both trading at -- 1.0SD valuation level (vs. peers’ at -0.5 to mean valuation).

Source: Kenanga Research - 13 Jul 2020