Review of May figures:

May inventory of 1.57m MT (+1.5% MoM) came above our, but below consensus’, forecast. Deviation from our estimate was mainly due to lower exports particularly from Islamic countries and slower stockpiling activities from China and India. Production of 1.57m MT is in line with both our and consensus’ estimates.

Our projection for June: 

For June, we forecast: (i) production growth (+1.4% MoM), as growth in East Malaysia is offset by decline in Peninsular, and (ii) exports to rise (+3.1% MoM). Exports should improve for the remaining months as businesses overcome the initial struggles of obtaining approvals from relevant local authorities. Data from cargo surveyors for 1st – 10th June have shown an average 12% MoM decline. All in, we expect total supply to outstrip total demand, leading to higher ending stocks of 1.67m MT (+6.4% MoM).

Our thoughts on the sector:

Moving forward, the prevailing key factors remain: (i) stockpiling activities by India and China, (ii) labour situation, (iii) movement restriction developments, (iv) supply-demand dynamics of soybean market, and (v) biodiesel mandates. Stay NEUTRAL on the plantation sectorwith an unchanged CY21 CPO price forecast of RM3,000/MT.Expectations of rising inventory levels have begun to weigh on CPO price and should continue into June. However, any shock to supply from stricter movement controls will turn the tide. Upstream-centric preferred picks to capitalise on high CPO prices are SIMEPLT (OP; TP: RM5.65) and HSPLANT (OP; TP: RM2.15).Our integrated pick with defensive overall margin against the CPO price variability is KLK (OP; RM25.10).

May 2021 CPO inventory rose (+1.5% MoM) to c.1.57m metric tons (MT). This is above our estimate of 1.46m MT (-5.6% MoM), but below consensus’ estimate of 1.64m (+6.3% MoM). The deviation from our estimate was mainly due to lower exports (-6.0% MoM) attributable to: (i) Iran (-71% MoM), (ii) Turkey (-38% MoM), (iii) Ghana (-97% MoM), and slower stockpiling activities from China and India. Production of 1.57m MT is in line with both our/consensus estimates of 1.59m/1.58m MT, respectively.

Forecasting June 2021 production to rise (+1.4% MoM) to 1.59m MT. We expect continued production growth in Sabah and Sarawak in June, while Peninsular Malaysia continues to take a breather. Premised on these reasons, we forecast 1.4% MoM increase in overall production in June 2021.

Exports to rise (+3.1% MoM) to 1.30m MT in June 2021. Data from cargo surveyors for 1st – 10th June showed an average decline of 12% MoM. We think that this could be a temporary effect from the sudden implementation of Phase 1 MCO 3.0 as businesses struggled to obtain approvals from relevant local authorities. We expect exports to improve gradually for the remaining of the month which should be driven by China and India’s oils and fats inventory replenishment activities. 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 India and China’s inventories have begun to climb.

June 2021 inventory to increase (+6.4% MoM) to 1.67m MT. All-in, we expect total supply of 1.68m MT to outstrip total demand of 1.58m MT, leading to higher ending stocks of 1.67m MT in June. The key factors to continue focusing on in the coming months are: (i) stockpiling activities by India and China, (ii) labour situation as we approach peak production season, (iii) movement restriction developments, (iv) supply-demand dynamics of soybean market, and (v) biodiesel mandates fulfilment.

Stay NEUTRAL on the plantation sector with an unchanged CY21 CPO price forecast of RM3,000/MT. Expectations of rising inventory levels have begun to weigh on CPO price. This will be more evident should June’s inventory levels rise as anticipated. However, any shock to supply from stricter movement controls will turn the tide. We think valuations of planters under our coverage and the KLPLN index (both at below -1.0SD from mean) seem to have somewhat priced in the negatives. Upstream-centric preferred picks to capitalise on high CPO prices are SIMEPLT (OP; TP: RM5.65) and HSPLANT (OP; TP: RM2.15). Our integrated pick with defensive overall margin against the CPO price variability is KLK (OP; RM25.10).

Source: Kenanga Research - 11 Jun 2021