Review of December figures:

December inventory of 1.26m MT (-19.0% MoM) came in below our estimate, but more or less within consensus’ estimate. The deviation came from higher-than-expected exports as we had underestimated the one-off demand in December (to capitalise on the pre-CPO export tax period). Key contributors to the surge in exports came from: (i) India (+169% MoM), (ii) Kenya (+177% MoM), (iii) Turkey (+651% MoM), (iv) Nigeria (+170% MoM), and (v) Iran (+956% MoM).

Our projection for January:

For January, we forecast: (i) lower production (-10.2% MoM), in line with our earlier peak-to-trough production study and as production typically dips 3-4 months consecutively after peaking (Sep), and (ii) exports to normalise (-25.0% MoM). Data from cargo surveyors for 1st – 10th January have shown an average 35% MoM decline in exports. All-in, we expect total demand to outstrip total supply leading to lower ending stocks of 1.17m MT (-7.1% MoM).

Our thoughts on the sector:

Moving forward, the key factors to focus on are: (i) strength of production recovery, (ii) supply-demand dynamics of soybean market, and (iii) biodiesel mandates fulfilment.StayNEUTRALon the plantation sector, whilewe leave our CY21 price forecast of RM2,600/MT unchanged for now.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).To ride on earnings growth, we recommend undervalued HSPLANT (OP; RM2.15), which estates are 100% in Malaysia allowing the group to fully benefit from higher CPO price.

December 2020 CPO inventory fell (-19.0%) MoM to c.1.26m metric tons (MT). This is below our estimate of 1.47m MT (-5.6% MoM), but more or less within consensus’ estimate of 1.22m MT (-22.0% MoM). The deviation came from higher-than-expected exports of c.1.62m MT (+24.7% MoM) as we had underestimated the one-off demand in December (to capitalise on the pre-CPO export tax period). Key contributors to the surge in exports came from: (i) India (+169% MoM), (ii) Kenya (+177% MoM), (iii) Turkey (+651% MoM), (iv) Nigeria (+170% MoM), and (v) Iran (+956% MoM).

Forecasting January 2021 production to trend lower (-10.2% MoM) to 1.20m MT. In our earlier report (dated 6-Jan-2021: https://bit.ly/3brtGCp), we conducted a peak-to-trough production study to highlight the possibility of production bottoming out at c.1.2m MT. Consequently, we forecast production to decline further by 10.2% MoM in January (fourth consecutive monthly decline). Note that production typically dips 3-4 months consecutively, which aligns with our forecast.

Exports to normalise (-25.0% MoM) to 1.22m MT in Jan 2021. We caution that the surge in December’ exports is not sustainable as it is just a one-off buying spurt. Furthermore, while we can expect higher Malaysia’s exports of CPO (c.25% of 2020 palm oil exports) especially to India given its reduction in CPO import duty, Malaysia is likely to lose market share in terms of the exports of refined palm oil products (c.75% of 2020 palm oil exports) given Indonesia’s refiners’ advantage from the current export levy and tax structure. Additionally, with the CPO futures curve in backwardation, it essentially discourages immediate stockpiling activity given lower forward prices. Export data from cargo surveyors for 1st – 10th January have shown an average decline (-35% MoM), validating our view.

January 2021 inventory to shrink (-7.1% MoM) to 1.17m MT, but not for much longer. All-in, we expect total demand of 1.49m MT to outstrip total supply of 1.40m MT, leading to lower ending stocks of 1.17m MT in January. Moving forward, the key factors to focus on are: (i) strength of production recovery, (ii) supply-demand dynamics of soybean market, and (iii) biodiesel mandates fulfilment.

Stay NEUTRAL on the plantation sector, while we leave our CY21 CPO price forecast of RM2,600/MT unchanged for now. We believe the reasons share prices have not followed CPO price surge are: (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) which estates are 100% in Malaysia allowing the group to fully benefit from higher CPO price (vs. Indonesia upstream planters’ cap at c.RM2,600-2,700/MT).

Source: Kenanga Research - 12 Jan 2021