September 2020 CPO inventory came in higher (+1.2%) MoM at 1.73m metric tons (MT). This is within both our/consensus’ estimates of 1.75m/1.72m MT (+2.6%/+1.0% MoM). However, output of 1.87m MT (+0.3% MoM) was slightly below both our/consensus’ estimate of 1.95m MT. Meanwhile, exports rose (+1.9% MoM) to 1.61m MT with key contributors from: (i) India (+14% MoM), (ii) Bangladesh (+17.6x), (iii) South Africa (+179% MoM), and (iv) Philippines (+51% MoM) which we believe was mainly due pre-festive season (Diwali) demand (except for Philippines).

Forecasting October 2020 production to rise further (+2.8% MoM) to 1.92m MT as we enter the peak production months. Most planters (especially those with estates primarily in Malaysia) now believe that peak production could be delayed a month and occur in Oct-Nov 2020 due to heavy rainfall in earlier months. Our view is in line with planters.

Expecting exports to rise (+3.6% MoM) to 1.67m MT in Oct 2020. While we note that inventory replenishment efforts have slowed down, we forecast exports to climb (+3.6% MoM) in October 2020, ahead of the Diwali festive season. Data from cargo surveyors (Intertek & AmSpec) for 1st – 10th October have also shown an average rise in exports of 13% MoM and we expect pre-festive season stock-piling activities to taper off towards the end of the month.

October 2020 inventory to remain flat (+0.4% MoM) at 1.73m MT. All-in, we expect total supply of 1.97m MT to more or less equal total demand of 1.96m MT, leading to flat ending stocks of 1.73m MT in October. While we believe production should peak in November and lead to an increase in inventory levels, the spotlight should be on how demand will be impacted on the following considerations: (i) potential demand switch from palm oil to soybean oil during winter (Dec to Mar) due to soybean oil’s lower solidification temperature, (ii) Malaysian palm oil export tax structure beyond Dec 2020 (currently 0% until the end of Dec 2020), and (iii) biodiesel implementation uncertainties due to wide POGO spread of USD375/MT (vs. 2-year average USD39/MT). In addition, a narrow soybean oil-palm oil (SBOCPO) spread of c.USD26/MT (vs. 2-year average of c.USD100/MT), potentially undermines CPO’s competitive edge against rival oils.

Stay NEUTRAL on the plantation sector. Our CY20 CPO price forecast of RM2,500/MT remains unchanged. 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 - 13 Oct 2020