Review of February figures:

February inventory of 1.30m MT (-1.8% MoM) came within our estimate, but below consensus’ estimate. Production declined (-1.9% MoM) as the fall in East Malaysia outpaced the recovery in Peninsular. Exports fell (- 5.5% MoM) seasonally.

Our projection for March:

For March, we forecast: (i) production recovery (+8.5% MoM), as Peninsular continues to improve, while East Malaysia begins its recovery (after five consecutive monthly declines), and (ii) exports to rise (+9.4% MoM), ahead of Ramadan. All in, we expect total supply to outstrip total demand leading to higher ending stocks of 1.35m MT (+3.4% MoM).

Our thoughts on the sector:

Moving forward, the key factors to focus on are: (i) strength of production recovery, (ii) exports to India, (iii) supply-demand dynamics of soybean market, and (iv) biodiesel mandates fulfilment. Stay NEUTRAL on the plantation sector with an unchanged CY21 CPO price forecast of RM3,000/MT. Integrated players such as KLK (OP; RM26.80) and IOICORP (OP; RM4.95) are our picks to weather through decline in CPO prices as they have better earnings stability – with downstream segments neutralising volatility in commodity prices. Meanwhile, to continue riding earnings growth from higher CPO price, we like upstream planters with attractive valuations like HSPLANT (OP; RM2.15) premised on its estates which are 100% located in Malaysia allowing the group to fully benefit from higher CPO prices (vs. Indonesia upstream planters’ cap at c.RM2,600/MT).

February 2021 CPO inventory fell (-1.8%) MoM to c.1.30m metric tons (MT). This is within our estimate of 1.26m MT (-4.5% MoM), but below consensus’ estimate of 1.40m MT (+5.7% MoM). Production came in at 1.11m MT (-1.9% MoM) as the decline in East Malaysia outpaced recovery in Peninsular. Exports fell (-5.5% MoM) attributed to seasonality.

Forecasting March 2021 production to rise (+8.5% MoM) to 1.20m MT. After five consecutive monthly declines, Peninsular’s production has begun to recover and we expect this to continue in March. On the other hand, production in East Malaysia declined for five consecutive months and is at its lowest level since February 2016, potentially exacerbated by the shorter working month and Chinese New Year holidays. We believe this should reverse in March – forecasting 8.5% MoM increase in overall production in March 2021.

Exports to rise (+9.4% MoM) to 980k MT in March 2021. Despite data from cargo cargo surveyors for 1st – 10th March showing an average decline of 22%, we think exports to Muslim countries will improve in the coming months, ahead of Ramadan. 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 could harm demand for CPO.

March 2021 inventory to climb (+3.4% MoM) to 1.35m MT. All-in, we expect total supply of 1.33m MT to outstrip total demand of 1.28m MT, leading to higher ending stocks of 1.35m MT in March. The key factors to focus on in the coming months are: (i) strength of production recovery, (ii) exports to India, (iii) supply-demand dynamics of soybean market, and (iv) biodiesel mandates fulfilment.

Stay NEUTRAL on the plantation sector with an unchanged CY21 CPO price forecast of RM3,000/MT. Integrated players such as KLK (OP; RM26.80) and IOICORP (OP; RM4.95) are our picks to weather through decline in CPO prices as they have better earnings stability – with downstream segments neutralising volatility in commodity prices. Meanwhile, to continue riding earnings growth from higher CPO price, we like upstream planters with attractive valuations like HSPLANT (OP; RM2.15) premised on its estates which are 100% located in Malaysia allowing the group to fully benefit from higher CPO prices (vs. Indonesia upstream planters’ cap at c.RM2,600/MT).

Source: Kenanga Research - 11 Mar 2021