Review of June figures:

June inventory of 1.61m MT (+2.8% MoM) came below both our/consensus’ estimates. Deviation from our estimatewas mainly due to higher exports attributable to: (i) China (+47% MoM), (ii) Iran (161% MoM), and (iii) Nigeria (+590% MoM). Production of 1.61m MT is in line with our estimate of 1.59m MT.

Our projection for July:

For July, we forecast: (i) production growth (+2.2% MoM), as Sabah’s production takes a breather, while Peninsular and Sarawak’s production continue to grow, and (ii) exports to rise (+3.5% MoM). China with its palm oil inventory level at 3- year low should continue replenishment activities, and India should see increased exports towards the end of July from its import restriction removal. Data from cargo surveyors for 1 st – 10th July have shown an average 3% MoM increase.All in, we expect total supply to offset total demand, leading to flat ending stocks of 1.62m MT (+0.3% 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 NEUTRALon the plantation sectorwith an unchanged CY21 CPO price forecast of RM3,000/MT.Headwinds like: (i) CPO price volatility, and (ii) ESG concerns, are weighing on the sector, but we think valuations of planters under our coverage and KLPLN index (-1.5SD from mean) have priced in the bulk of the negatives. Integrated players like KLK (OP; TP: RM24.00)with defensive overall margin against CPO price variability, and SIMEPLT (OP; TP: RM4.95) with greater earnings clarity from forward sales appeal to us. Potential resolution of the WRO by U.S. CBP is an additional catalyst.

June 2021 CPO inventory rose (+2.8% MoM) to c.1.61m metric tons (MT). This is below both our/consensus’ estimates of 1.67m/1.69m MT (+6.4%/+7.4% MoM), respectively. The deviation is mainly due to higher exports (+11.8% MoM) against our +2.8% MoM estimate attributable to: (i) China (+47% MoM), (ii) Iran (+161% MoM), and (iii) Nigeria (+590% MoM). Production of 1.61m MT is in line with our estimate of 1.59m MT.

Forecasting July 2021 production to climb (+2.2% MoM) to 1.64m MT. We think production in Peninsular and Sarawak should increase, while Sabah’s production could take a breather. We forecast 2.2% MoM increase in overall production in July 2021. Peak production is likely to happen in Sep-Oct.

Exports to rise (+3.5% MoM) to 1.47m MT in July 2021. Data from cargo surveyors for 1st – 10th July showed an average increase 3% MoM. We expect continued inventory replenishment activities from China. As of June 2021, China palm oil inventory level is at a 3-year low. Meanwhile, India’s refined palm oil import restriction removal should result in increased exports towards the end of July.

July 2021 inventory to remain flat (+0.3% MoM) to 1.62m MT as total supply of c.1.73m MT offsets total demand of c.1.73m MT. 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 CY21 CPO price forecast of RM3,000/MT. While headwinds like: (i) CPO price volatility, and (ii) ESG concerns, continue to weigh on the sector, we think valuations of planters under our coverage and KLPLN index (-1.5SD from mean) seem to have priced in the bulk of the negatives. Our integrated pick with defensive overall margin against the CPO price variability is KLK (OP; RM24.00). We also like SIMEPLT (OP; RM4.95) as its earnings are relatively shielded by forward sales. Additional share price catalyst which will have a spillover effect on the sector is the potential resolution of the WRO by U.S. CBP.

Source: Kenanga Research - 13 Jul 2021