NEUTRAL on the plantation sector while CY21E CPO price of RM2,600/MTremains unchanged for now.Key speakers of POTS Digital 2021 were generally less optimistic for CPO price in 2HCY21. Both Mr. Dorab Mistry and Mr. Thomas Mielke foresee price pressure by 2HCY21, led by strong palm oil production recovery.We concur with the bearish view, but with a slight timing difference. We think historical trends (peak in 1QCY) may prevail as market participants sell ahead of the expected 2HCY price decline. One key remark stood out to us -if CPO price remains at c.RM4,000/MT or higher,there may be a need to re-evaluate biodiesel levy structures, implying that Indonesia’s B30 mandate could be at risk, yet again. Key winners of Indonesia’s current biodiesel levy structure (and any increase in the levy structure) are Malaysian upstream planters like HSPLANT (OP; RM2.15), and TAANN (OP; RM3.45), while losers are Indonesian upstream planters like IJMPLNT (UP; RM1.70) which are seeing realised CPO price capped at RM2,600-2,700/MT due to the levy. In our attempt to be ahead of the curve, we advocate positioning for a decline in CPO price by building positions in integrated players such as KLK (OP; RM26.00), and IOICORP (OP; RM4.95).Toride on earnings growth, we recommend undervaluedHSPLANT (OP; RM2.15), which estates are 100% in Malaysia allowing the group to fully benefit from higher CPO price.

POTS Digital 2021. We attended the Palm Oil Trade Fair and Seminar (POTS Digital) 2021 organised by the Malaysian Palm Oil Council (MPOC). The event was well received, with a total of >25,000 registrations from across the global oils and fats industry. We returned maintaining our stance of positioning for softer CPO price in the coming months. Still a NEUTRAL call on the sector, while our CY21 CPO price forecast of RM2,600/MT remains unchanged for now.

Key speakers were less optimistic for CPO price in 2HCY21. During the seminar, the general view on CPO price is that it should remain elevated in 1HCY21 due to tight supply-demand dynamics, while price pressure is expected in 2HCY21 (See Exhibit 2 for key speakers’ remarks). According to Mr. Dorab Mistry (Director of Godrej International), there were six propelling forces to the meteoric rise in CY20 CPO price – (i) palm oil production shortfall, (ii) implementation of B30 mandate, (iii) stockpiling activities from China, (iv) rival oils’ production shortfall, (v) Malaysia’s palm oil export duty exemption, and (vi) La Niña. However, out of the six forces, only two are left - (i) stockpiling activities from China, and (ii) La Niña (affecting palm and soy production), which will be the key factors to watch. Mr. Dorab thinks CPO price could rise further to >RM4,000/MT (forecasting CPO price between RM3,700-3,800/MT in Jan-Feb 2021), but should moderate after May 2021 and possibly fall dramatically in Jul-Aug 2021 (production recovery-led). While no price forecasts were provided, Mr. Thomas Mielke (CEO & Chief Editor of Oil World) believes profit taking could happen in the near-term and prices should come under pressure by 2HCY21. Recent rainfall recovery in South America could alleviate soybean supply concerns.

Concur with bearish view, but with a slight timing difference. While we concur with the general view that prices should correct, we believe the timing could be slightly different. From our study (Exhibit 1), we observed that the peak of major CPO price rallies all occurred in 1QCY. Despite key speakers’ consensus view of downside to CPO price in 2HCY21, we believe the historical trends (peak in 1QCY) may prevail as market participants digest the views of key speakers and sell ahead of the expected 2HCY decline.

One key remark that stood out to us from Mr. Togar Sitanggang (Vice Chairman of GAPKI) was that if CPO price remains at c.RM4,000/MT or higher, there may be a need to re-evaluate biodiesel levy structures, implying that Indonesia’s B30 mandate (c.8m MT CPO consumption) could be at risk, yet again. The key winners of Indonesia’s current biodiesel levy structure and any increase in the levy structure are Malaysian upstream planters like HSPLANT (OP; RM2.15), and TAANN (OP; RM3.45). From what we gathered on the ground, Indonesian upstream planters like IJMPLNT (UP; RM1.70) are seeing realised CPO price capped at RM2,600-2,700/MT due to the levy, and therefore, would be unable to enjoy the full benefits of the rise in CPO prices.

Our attempt to be ahead of the curve. We believe the reason share prices have not followed CPO price surge is due to: (i) unsustainably high commodity prices, and (ii) lower FFB output weighing on earnings growth. In positioning for a decline in CPO price, we advocate building positions in integrated players such as KLK (OP; RM26.00), and IOICORP (OP; RM4.95) which have better earnings stability during volatile commodity prices. Meanwhile, to enjoy earnings growth in 4QCY20 (Feb 2021 reporting season), while limiting potential downside from an anticipated decline in CPO price, we recommend upstream planters with attractive valuations like HSPLANT (OP; RM2.15). Note that among the upstream planters, HSPLANT also has one of the lowest CPO price-to-share price correlations (Exhibit 3), which may limit downside when CPO price reverses into a downtrend.

Source: Kenanga Research - 11 Jan 2021