October 2020 CPO inventory came in lower (-8.6%) MoM at 1.57m metric tons (MT). This is below our estimate of 1.73m MT (+0.4% MoM), but within consensus’ estimate of 1.56m MT (- 9.6% MoM). The deviation was due to lower-than-expected production of 1.72m MT (-7.7% MoM) vs. our estimated 1.92m MT (+2.8% MoM). Meanwhile, exports rose (+3.8% MoM) to 1.67m MT (in-line with our +3.6% MoM) with key contributors from: (i) India (+13% MoM), (ii) Ghana (+434% MoM), (iii) Iran (+122% MoM), and (iv) Nigeria (+1,065% MoM), which we believe was mainly due pre-festive season demand (Diwali & Islamic holidays).

Forecasting November 2020 production to dip (-3.7% MoM) to 1.66m MT. While most planters believe that peak production will occur in Oct-Nov 2020, anecdotal evidences now suggest that peak production could have occurred in September as cropping patterns could have shifted ahead. Typically, production dips for 3-4 months after peaking and as such, we forecast production to dip further by 3.5% MoM in November.

Expecting exports to decline (-9.2% MoM) to 1.52m MT in Nov 2020. Data from cargo surveyors (Intertek & AmSpec) for 1st – 10th November have shown an average decline in exports of 18% MoM. We believe this is due to pre-festive season stockpiling activities tapering off. Note that the remaining major festivals and holidays for 2020 will occur in November (except for Christmas and New Year’s Eve). Accordingly, we forecast exports to decline 9.2% MoM in November.

November 2020 inventory to shrink further (-3.3% MoM) to 1.52m MT. All-in, we expect total demand of 1.76m MT to outstrip total supply of 1.71m MT, leading to lower ending stocks of 1.52m MT in November. Moving forward, aside from the seasonal decline in production, 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 an all-timehigh POGO spread of USD503/MT (vs. 2-year average USD64/MT). In addition, a negative soybean oil-palm oil (SBO-CPO) spread of c.- USD38/MT (vs. 2-year average of c.+USD93/MT), undercuts CPO’s competitive edge. Soybean oil is now cheaper than palm oil.

Stay NEUTRAL on the plantation sector. We leave our CY20 CPO price forecast of RM2,500/MT unchanged, nearing the year end. 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: RM26.00), traded at -1.5SD (vs. big cap peers’ -0.5SD).

Source: Kenanga Research - 11 Nov 2020