Stay NEUTRAL on the plantation sector with unchanged CY20ECPO price of RM2,500/MT.Key speakersof Tri-StarMega Webinar were generally less optimistic on CPO price in the near-term, but more positive on prices in 2021. In the nearterm, CPO price upside is limited by the wide spread between palm oil and crude oil, seasonally higher production, and potential loss of demand due to current high prices. For 2021, edible oils demand recovery (post-virus) should support prices, while La Niña could induce a price rally – with soybean oil leading the way. Our views are similar. While we are turning more optimistic on the sector’s outlook in CY21, we see downside to CPO price in the near-term premised on: (i) loss of competitive edge against soybean due to narrow SBO-PO spread, (ii) wide POGO spread causing uncertainties in the implementation of biodiesel mandates, and (iii) a steep inverted futures curve. That said, to position for a recovery in CY21, we recommend being selective and slowly build positions in bashed down names like HSPLANT (OP; TP: RM1.95) and TAANN (OP; TP: RM3.45), both being traded at -1.0SD valuation level (vs. peers’ -0.5 to mean valuation). For big caps, we like KLK (OP; TP: RM25.00), also traded at -1.0SD (vs. big cap peers’ -0.5SD).

Tri-Star Mega Webinar. We attended the Tri-Star Mega Webinar organised by The Solvent Extractors Association Of India (SEA) & Globoil India yesterday. The event was well attended, with c.750 participants from across the global oils and fats industry. We returned, turning more optimistic on the sector’s outlook in CY21. For now, we maintain our NEUTRAL stance on the industry’s near-term prospects with our CY20 CPO price forecast of RM2,500/MT unchanged.

Generally less optimistic on upside for CPO price in 2020… During the seminar, the general view was that upside for CPO price, at least for the next few months is limited. According to Dr James Fry (Chairman of LMC International), CPO price is at the peak of the price band (palm oil-crude oil) of USD425/MT, and without crude oil prices moving higher, it limits the upside of CPO price. Mr. Dorab Mistry (Director of Godrej International) believes that the vegetable oils market should trade sideways at best, or slightly lower until the U.S. election result. We concur with the general bearish near-term view given: (i) the loss of competitive edge against soybean (especially as winter is approaching) due to narrow soybean oil-palm oil (SBO-PO) spread of USD16/MT (vs. 2-year average of USD100/MT), (ii) uncertainties in the implementation of biodiesel mandates stemming from wider palm oil-gasoil (POGO) of USD376/MT (vs. 2-year average of USD37/MT), and (iii) steep decline the futures curve (c.RM400/MT).

… but more positive in 2021. Despite expectations of La Niña boosting production, edible oil demand is also expected to recover in 2021. According to Mr. Dorab Mistry, one should look for a La Niña-induced price rally from January 2021 onwards, with soyoil leading the way. Although he has no price forecasts, he stated that average price of vegetable oils in CY21 should be higher than CY20. Meanwhile, Mr. Thomas Mielke (CEO of Oil World) forecasted CPO price at USD700/MT (v.RM2,900/MT) for 1HCY21. While we agree with the view that edible oil demand should return in CY21 (post-virus), there is a risk to shortfall of the implementation of biodiesel mandates in countries aside from Indonesia that has indicated its commitment to the successful implementation of its B30 mandate. As such, we are keeping our CY21 CPO price forecast unchanged for now.

Upside to MPOB’s CY20 CPO production forecast. In our previous reports dated 6-Oct-2020 and 9-Jul-2020, we highlighted the upside to MPOB’s CY20 CPO production forecast for Malaysia of 19.0m MT (-4.3% YoY) and kept our forecast of 19.5m MT (-1.8% YoY). Our premise was simple – with YTD-8MCY20 CPO production at 12.7m MT, our forecast implies an average (Sep-Dec) CPO production of 1.70m MT/month which is closer to the 5-year (Sep-Dec) average of 1.75m MT/month (vs. MPOB’s figure that implies 1.57m MT/month, which is the 5-year (Sep-Dec) average low. Our view is also shared by Mr. Dorab Mistry who reiterated his CY20 CPO production forecast of c.20m MT (flat; +0.7% YoY). This is likely to result in inventory levels rising gradually in the coming months, which should exert pressure on CPO price in the enar-term. As forecasted by Dr. James Fry, MPOB inventory levels should rise to 2.0m MT towards the end of 2020, but to gradually decline in early-2021.

Stay NEUTRAL on the plantation sector with an unchanged CY20 CPO price forecast of RM2,500/MT. While we are turning more optimistic on the sector’s outlook in CY21, we see downside to CPO price in the very near-term which should result in increased share price volatility. Nevertheless, to position for a recovery in CY21, we recommend being selective and slowly build positions in bashed down names like HSPLANT (OP; TP: RM1.95) and TAANN (OP; TP: RM3.45), both being traded at -1.0SD valuation level (vs. peers’ -0.5 to mean valuation). For big caps, we like KLK (OP; TP: RM25.00), also traded at -1.0SD (vs. big cap peers’ -0.5SD).

Source: Kenanga Research - 9 Oct 2020