Review of July figures:
July inventory of 1.70m MT (-10.6% MoM) came below our estimate of 1.90m MT (+0.4% MoM) but within consensus’ estimate of 1.67m MT (-11.8% MoM). The deviation was mainly due to: (i) lower-than-expected production (-4.1% MoM) vs. our estimate (-1.8% MoM), and (ii) higher-than-expected exports (+4.2% MoM) vs. our estimate (-9.4% MoM).The jump in exports is mainly attributable to two countries – India (+85.0% MoM) and Iran (+631.1% MoM), which we believe was due to: (i) pent-up demand, and (ii) 0% palm oil export tax for Jun-Dec 2020.

Our projection for August:
For August, we forecast: (i) dip in production (-1.4% MoM) to 1.78m MT as trees continue to take a breather, (ii) decline in exports to 1.70m MT (-4.5% MoM) as pent-up demand gradually fizzles out. Data from cargo surveyors for 1st–10thAugust have shown an average decline in exports of 5.5% MoM, corroborating our view. All-in, we expect total demand of 1.99m MT to outstrip total supply of 1.84m MT leading to lower ending stocks of 1.55m MT (-8.8% MoM) in August.

Our thoughts on the sector:
We anticipate a gradual rise in inventory levels beyond August, as: (i) pent-up demand fizzles out, and (ii) production enters peak season in 2HCY20 which should exert pressure on CPO price.Additionally, due to the recent CPO price rally, SBO-CPO spread hasturned negativetoc.USD-1/MT (vs.2-year averageofc.USD+106/MT), reducing CPO’s competitive edge against its rival oils.Stay NEUTRAL on the plantation sector.Our CY20 CPO price forecast of RM2,300/MT remains. For investors that require exposure in the sector, we recommend HSPLANT (OP; TP: RM1.95), a laggard play – trading at a more palatable -0.75SD valuation level (vs. peers’ mean to +0.5SD).

July 2020 CPO inventory fell (-10.6%) MoM to 1.70m metric tons (MT). This is below our estimate of 1.90m MT (+0.4% MoM) but within consensus’ estimate of 1.67m MT (-11.8% MoM). Key deviations were: (i) lower-than-expected production (-4.1% MoM) vs. our estimate (-1.8% MoM), and (ii) higher-than-expected exports (+4.2% MoM) vs. our estimate (-9.4% MoM). The jump in exports is mainly attributable to two countries – India (+85.0% MoM) and Iran (+631.1% MoM), which we believe was due to: (i) pent-up demand, and (ii) 0% palm oil export tax for JunDec 2020. Having said that, we caution on the sustainability of large exports after stockpiling activities are completed. Already, we are seeing signs of exports to China slowing (-17.9% MoM). Note that China reopened its economy earlier than India.

Forecasting August 2020 production to dip (-1.4% MoM) to 1.78m MT as trees continue to take a breather following the surge in production since Jan 2020 to Jun 2020. While this period may offer a brief relief to CPO prices, we emphasize on the peak production season that is yet to come. Most planters (especially those with estates primarily in Malaysia) believe that we should see another peak production in Sep-Oct 2020. Our view is in line with planters.

Expecting exports to decline (-4.5% MoM) to 1.70m MT in Aug 2020. We believe the recent spike in exports was mainly fueled by inventory replenishment efforts from India and China, alongside the 0% palm oil export tax for Jun-Dec 2020 (making Malaysian palm oil more competitive than Indonesia). Moving forward, we expect the pent-up demand to gradually fizzle out - India’s oils and fats ending stock for July has already recovered to 806k MT (-7.2% YoY) vs. June’s 616k MT (-24.7% YoY). We also expect China to ramp up soybean purchases which could possibly result in lower palm oil purchases. Meanwhile, CPO price (Aug-MTD MPOB average: RM2,852/MT) is 10.7% higher than July’s average of RM2,577/MT which could discourage exports. Taking all these into consideration, we forecast exports to decline 4.5% MoM to 1.70m MT in August 2020. Data from cargo surveyors (AmSpec, Intertek) for 1st – 10th August has also shown an average decline in exports of 5.5% MoM, corroborating our view.

August 2020 inventory to fall (-8.8% MoM) to 1.55m MT. All-in, we expect total demand of 1.99m MT to outstrip total supply of 1.84m MT, leading to lower ending stocks of 1.55m MT in August. We anticipate a gradual rise in inventory levels beyond August, as: (i) pent-up demand fizzles out, and (ii) production enters peak season in 2HCY20 which should exert pressure on CPO prices. In addition, due to the recent CPO price rally, soybean oil-palm oil (SBO-CPO) spread has turned negative to c.USD-1/MT (vs. 2-year average of c.USD+106/MT), potentially undermining CPO’s competitive edge against rival oils.

Stay NEUTRAL on the plantation sector. Our CY20 CPO price forecast of RM2,300/MT remains and we advise caution in the space. For investors that require exposure in the sector, we recommend HSPLANT (OP; TP: RM1.95), a laggard play – trading at a more palatable - 0.75SD valuation level (vs. peers’ mean to +0.5SD).

Source: Kenanga Research - 11 Aug 2020