Review of January figures:

January inventory of 1.33m MT (+4.8% MoM) cameabove our estimate, but more or less within consensus’estimate.The deviation came from significantly lower-than-expected exports. The key contributor to the decline in exports was none other than India (-74% MoM).

Our projection for February:

For February, we forecast: (i) production recovery (+12.2% MoM), in line with our earlier peak-to-trough production study and as production typically recovers after 3-4 consecutive monthly declines, and (ii) exports to rise (+28.3% MoM). Data from cargo surveyors for 1st – 10th January have shown an average 50% MoM increase in exports. All-in, we expect total demand to outstrip total supply leading to lower ending stocks of 1.26m MT (-4.5% MoM).

Our thoughts on the sector:

Moving forward, the key factors to focus on are: (i) strength of production recovery beyond February, (ii) exports to India (deteriorating CPO to rival oils competitive advantage given higher CPO import duties in India), (iii) supply-demand dynamics of soybean market, and (iv) biodiesel mandates fulfilment. Stay NEUTRAL on the plantation sector. Maintaining our view of a decline in CPO prices, we advocate building positions in integrated players such as KLK (OP; RM26.00) and IOICORP (OP; RM4.95). To ride on4QCY20 earnings growth, we recommend undervalued HSPLANT (OP; RM2.15) with: (i) decent CPO output (merely -2% QoQ) and (ii) estates which are 100% in Malaysia allowing the group to fully benefit from higher CPO price.

January 2021 CPO inventory rose (+4.8%) MoM to c.1.33m metric tons (MT). This is above our estimate of 1.17m MT (-7.1% MoM), but more or less within consensus’ estimate of 1.29m MT (+1.7% MoM). The deviation came from the significantly lower-than-expected exports of c.947k MT (-41.7% MoM) compared to ours (-28.0% MoM). The key contributor to the decline in exports was none other than India (-74% MoM) which is not surprising given that India was also the main contributor (+169% MoM) to Dec 2020’s one-off demand surge.

Forecasting February 2021 production to rise (+12.2% MoM) to 1.26m 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. With Jan 2021 production reaching a low of c.1.13m MT (fourth consecutive monthly decline and lowest level since Feb 2016), we now expect a reversal of the production downtrend – forecasting a 12.2% MoM increase in Feb 2021. Note that production typically recovers after 3-4 consecutive monthly declines, which aligns with our forecast. However, we note that the shorter working month and Chinese New Year holidays could slightly hamper the recovery.

Exports to rise (+28.3% MoM) to 1.22m MT in Feb 2021. After a steeper than usual decline (-41.7% MoM) in January, we expect exports to pick up in Feburary pre-Chinese New Year and forecast 28.3% MoM rise in exports for Feb 2021. Export data from cargo surveyors for 1st – 10th February have shown an average increase of 50% MoM, validating our view. That said, we think India’s recent policy changes on import duties are detrimental towards CPO’s competitive advantage against rival oils (refer to Exhibit 4) and would harm demand for CPO moving forward. Malaysia is also 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.

February 2021 inventory to shrink (-4.5% MoM) to 1.26m MT. All-in, we expect total demand of 1.51m MT to outstrip total supply of 1.45m MT, leading to lower ending stocks of 1.26m MT in February. Moving forward, the key factors to focus on are: (i) strength of production recovery beyond February (shorter working month), (ii) exports to India, (iii) supply-demand dynamics of soybean market, and (iv) biodiesel mandates fulfilment.

Stay NEUTRAL on the plantation sector. Maintaining our view of a decline in CPO prices, we advocate building positions in integrated players such as KLK (OP; RM26.00) and IOICORP (OP; RM4.95) which have better earnings stability as their downstream segments neutralise volatility in commodity prices and production. Meanwhile, to enjoy earnings growth in 4QCY20 (Feb 2021 reporting season), we recommend upstream planters with attractive valuations like HSPLANT (OP; RM2.15) premised on its: (i) decent CPO output (merely -2% QoQ), and (ii) estates which are 100% located in Malaysia allowing the group to fully benefit from higher CPO price (vs. Indonesia upstream planters’ cap at c.RM2,600/MT).

Source: Kenanga Research - 11 Feb 2021