Review of March figures:

March inventory of 1.45m MT (+11.2% MoM) came above both our/consensus’ estimate due to strong Peninsular production. Our earlier belief has been confirmed – production downtrend in Sabah and Sarawak has reversed. Exports rose (+31.8% MoM) driven by India, Kenya and Muslim countries, ahead of Ramadan.

Our projection for April:

For April, we forecast: (i) production growth (+11.2% MoM), as all regions continue their growth trajectory,and (ii) exports to rise (+17.6% MoM), ahead of the Islamic festive season and potential stockpiling activities from China and India. All in, we expect total supply to outstrip total demand leading to higher ending stocks of 1.53m MT (+5.5% MoM).

Our thoughts on the sector:

Moving forward, the key factors to focus on are: (i) stockpiling activities by India and China, (ii) labour situation approaching peak season, (iii) supply-demand dynamics of soybean market, and (iv) biodiesel mandates fulfilment. Stay NEUTRAL on the plantation sectorwith an unchanged CY21 CPO price forecast of RM3,000/MT. MPOB datafor Marchis bearish for prices while expectation of further rise in inventory levels is likely to cap the upside of CPO prices. We continue to believe the peak has occurred (if not, soon). However, valuations of planters under our coverage and the KLPLN index (both at -1.0SD from mean) seem to have somewhat priced in the negatives. Our upstream preferred stock pick to capitalise on the current strong CPO prices and yet able to soften the impact of subsequent price decline due to output growth is HSPLANT (OP; TP: RM2.15).Our integrated pick with defensive overall margin against the CPO price variability is KLK (OP; RM25.40).

March 2021 CPO inventory rose (+11.2%) MoM to c.1.45m metric tons (MT). This is above both our/consensus’ estimate of 1.35m/1.32m MT (+3.4%/1.3% MoM). The deviation was mainly due to higher-than-expected production of 1.42m MT (+28.4% MoM) attributed to strong Peninsular production (+31% MoM). As expected, exports increased (+31.8% MoM) ahead of Ramadan, predominantly driven by India (+42% MoM), Kenya (+215% MoM) and Muslim countries such as: (i) Iran (+397% MoM), (ii) Pakistan (159% MoM), and (iii) Turkey (+261% MoM).

Forecasting April 2021 production to rise (+11.2% MoM) to 1.58m MT. Our earlier belief has been confirmed by March’s production figures – the production downtrend in Sabah and Sarawak has reversed and we expect growth in all regions (Peninsular, Sabah & Sarawak) to continue in April. Premised on these reasons, we forecast 11.2% MoM increase in overall production in April 2021.

Exports to rise (+17.6% MoM) to 1.39m MT in April 2021. Data from cargo surveryors for 1st – 10th April showed an average increase of 11%. We think exports to Muslim countries will continue to improve for the remainder of April, ahead of the Islamic festive season. Additionally, we think China and India could start replenshing their oils and fats inventories. We observed a rising pattern in Malaysia’s palm oil exports to both countries when their oils and fats stock levels plummeted to multi-year lows in Apr-May 2020. Both countries’ inventory levels are now (as of March 2021) even lower.

April 2021 inventory to climb (+5.5% MoM) to 1.53m MT. All-in, we expect total supply of 1.71m MT to outstrip total demand of 1.63m MT, leading to higher ending stocks of 1.53m MT in April. The key factors to focus on in the coming months are: (i) stockpiling activities by India and China, (ii) labour situation as we approach peak production season, (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. The bearish MPOB data and expectations of further rise in inventory levels should weigh on CPO prices. We continue to believe that the peak has occurred (if not, soon). That said, valuations of planters under our coverage and the KLPLN index (both at -1.0SD from mean) seem to have somewhat priced in the negatives. Our upstream preferred stock pick to capitalise on the current strong CPO price and yet able to soften the impact of subsequent price decline due to output growth is HSPLANT (OP; TP: RM2.15). Our integrated pick with defensive overall margin against the CPO price variability is KLK (OP; RM25.40).

Source: Kenanga Research - 13 Apr 2021