November 2020 CPO inventory came in lower (-0.6%) MoM at 1.56m metric tons (MT). This is more or less within our/consensus’ estimate of 1.52m/1.54m MT (-3.3%/-2.2% MoM). However, production was lower-than-expected at 1.49m MT (-13.5% MoM) vs. our estimated 1.66m MT (- 3.7% MoM), offset by lower-than-expected exports of 1.30m MT (-22.1% MoM) vs. our estimated 1.52m MT (-9.2% MoM). Key contributors to the decline in exports came from: (i) India (-52% MoM), (ii) Iran (-95% MoM), (iii) Ghana (-85% MoM), (iv) Nigeria (-65% MoM), and (v) Turkey (-78% MoM), mainly due to post-festive season (Diwali & Islamic holidays) demand decline, as highlighted earlier.

Forecasting December 2020 production to trend lower (-7.7% MoM) to 1.38m MT. Earlier on, we highlighted that peak production could have occurred in September as cropping patterns could have shifted ahead. November production figures have now confirmed that peak production is indeed over. Typically, production dips 3-4 months consecutively after peaking and as such, we forecast production to decline further by 7.7% MoM in November.

Expecting a narrower decline for exports (-2.4% MoM) to 1.27m MT in Dec 2020. Data from cargo surveyors (Intertek & AmSpec) for 1st – 10th December have shown an average decline in exports of 6% MoM. We believe this is due to post-Diwali & Islamic holidays stockpiling activities tapering off. Having said that, we forecast the decline to narrow to 2.4% MoM by the end of December premised on our view that: (i) demand should pick up ahead of Christmas & New Year festivities, and that (ii) impact of India’s CPO import duty reduction should kick in towards the later part of December. Exports to India could also rise further in January as some importers may have already prearranged for December shipments before the duty reduction.

December 2020 inventory to shrink (-5.6% MoM) to 1.48m MT. All-in, we expect total demand of 1.55m MT to outstrip total supply of 1.46m MT, leading to lower ending stocks of 1.48m MT in December. Moving forward, aside from the seasonal decline in production, the spotlight should be on how the current tight supply-demand dynamics could be impacted on the following considerations: (i) strength of production recovery in 2021, (ii) potential demand switch from palm oil to soybean oil during winter (Dec to Mar) due to soybean oil’s lower solidification temperature, and (iii) Malaysian palm oil export tax structure beyond Dec 2020 (currently 0% until the end of Dec 2020). Note that demand concerns are exacerbated by the negative soybean oil-palm oil (SBO-CPO) spread of c.-USD55/MT (vs. 2-year average of c.+USD83/MT) which undercuts CPO’s competitive edge. Soybean oil is now cheaper than palm oil, potentially impacting palm oil exports to price sensitive countries such as China and India.

Stay NEUTRAL on the plantation sector with an unchanged CY21 CPO price forecast of RM2,600/MT. We recommend being selective and slowly build positions in bashed down names like HSPLANT (OP; TP: RM2.15), traded at steep 36%/25% discount in terms of PBV/PER valuation to its closest peer. For big caps, we like KLK (OP; TP: RM26.00), traded at -1.0SD valuation (vs. big cap peers’ -0.5SD).

Source: Kenanga Research - 11 Dec 2020