Review of August figures: August inventory of 1.70m MT (+0.1%MoM) came above our estimate of 1.55m MT (-8.8% MoM) but below consensus’ estimate of 1.79m MT (+5.4% MoM). The deviation was mainly due to: (i) higher-than-expected production (+3.1% MoM) vs. our estimate (-1.3% MoM), and (ii) lower-than-expected export (-11.3% MoM) vs. our estimate (-4.5% MoM). Key contributors to the decline in exports came from: (i) India (-28% MoM), (ii) Iran (-63% MoM), (iii) Pakistan (-48% MoM), and (iv) Turkey (-70% MoM) which we believe was due to slower stockpiling activities.

Our projection for September: For September, we forecast:(i)rise in production (+4.7% MoM) to 1.95m MTas we enter peak production months,and (ii) increase in exports to 1.63m MT (+3.1% MoM) ahead of Mid-Autumn and Diwali festive seasons. Data from cargo surveyors for 1st – 10th September have shown +10% MoM increase in exports, corroborating our view.All-in, we expect total supply of 2.00m MT to outstrip total demand of 1.95m MT leading to higher ending stocks of 1.74m MT (+2.6% MoM).

Our thoughts on the sector: We anticipate inventory levels to continue rising in the next few months, as: (i) pent-up demand fizzles out, and (ii) production peaks (est. peak: Sep-Oct) which should exert pressure on CPO prices. Narrow SBO-CPO spread of c.USD32/MT (vs. 2-year average of c.USD106/MT), potentially underminesCPO’s competitive edge against its rival oils.StayNEUTRAL on the plantationsector.We leave CY20 CPO price forecast of RM2,300/MT unchanged for now, with upside biasin our next strategy report. Our preferred picks are: HSPLANT (OP; TP: RM1.95), a laggard play – trading at a more palatable - 0.75SD valuation level (vs. peers’ mean to +0.5SD), and TAANN (OP; TP: RM3.15), at -0.5SD valuation level.

August 2020 CPO inventory came in flat (+0.1%) MoM at 1.70m metric tons (MT). This is above our estimate of 1.55m MT (-8.8% MoM) but below consensus’ estimate of 1.79m MT (+5.4% MoM). The deviation to our estimate was mainly due to: (i) higher-than-expected production (+3.1% MoM) vs. our estimate (-1.3% MoM), and (ii) lower-than-expected export (-11.3% MoM) vs. our estimate (-4.5% MoM). Key contributors to the decline in exports came from: (i) India (- 28% MoM), (ii) Iran (-63% MoM), (iii) Pakistan (-48% MoM), and (iv) Turkey (-70% MoM) which we believe was due to slower stockpiling activities.

Forecasting September 2020 production to rise further(+4.7% MoM)to 1.95m MT as we enter the peak production months. Most planters (especially those with estates primarily in Malaysia) believe that peak production should occur in the months of Sep-Oct 2020. Our view is in line with planters.

Expecting exports to rise (+3.1% MoM) to 1.63m MT in Sep 2020. While we note that inventory replenishment efforts have slowed down, we forecast exports to climb (+3.1% MoM) in September 2020, ahead of the Mid-Autumn and Diwali festive seasons. Data from cargo surveyors (AmSpec) for 1st – 10th September has also shown a rise in exports of 10% MoM, corroborating our view.

September 2020 inventory to climb (+2.6% MoM) to 1.74m MT. All-in, we expect total supply of 2.00m MT to outstrip total demand of 1.95m MT, leading to higher ending stocks of 1.74m MT in September. We anticipate a gradual rise in inventory levels moving forward on: (i) continued fizzling out of pent-up demand, (ii) production peaks in the coming months, and (iii) potential switch from palm oil to soybean oil during winter due to soybean oil’s lower solidification temperature. All these should exert pressure on CPO prices. In addition, narrow soybean oil-palm oil (SBO-CPO) spread of c.USD32/MT (vs. 2-year average of c.USD106/MT), potentially undermines CPO’s competitive edge against rival oils.

Stay NEUTRAL on the plantation sector. We leave CY20 CPO price forecast of RM2,300/MT unchanged for now, with upside bias in our next strategy report. 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) and TAANN (OP; TP: RM3.15), at -0.5SD valuation level.

Source: Kenanga Research - 11 Sept 2020