Review of July figures:

July inventory of 1.50m MT (-7.3%MoM) came below both our/consensus’ estimates. Deviation was mainly due to lowerthan-expected production due to shorter working month. Exports were flat as weaker China and India (-23%/-20% MoM) were offset by stronger EU and Turkey (+44%/+25x MoM).

Our projection for August:

For August, we forecast: (i) production to resume its uptrend (+7.0% MoM) post-festivities, and (ii) exports to climb (+3.2% MoM). Data from cargo surveyors for 1st – 10th Aug have shown an 11.5% MoM decline. However, India and China with low palm oil inventory level at multi-year lows should continue replenishment activities, while India’s recent refined palm oil import restriction removal should encourage further imports. All in, we expect total supply to offset total demand, leading to flat ending stocks of 1.49m MT (-0.5% MoM).

Our thoughts on the sector:

Moving forward, the prevailing key factors remain: (i) peak production strength, (ii) stockpiling activities by India and China, (iii) labour situation and movement restriction developments, (iv) supply-demand dynamics of soybean market, and (v) biodiesel mandates. Stay NEUTRAL on the plantation sector with 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. Valuations of planters under our coverage and KLPLN index (-1.5SD from mean) seem to have priced in the bulk of the negatives. However, the sector lacks catalyst. 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.

July 2021 CPO inventory fell (-7.3% MoM) to c.1.50m metric tons (MT). This is below both our/consensus’ estimates of 1.62m/1.64m MT (+0.3%/+1.6% MoM), respectively. The deviation is mainly due to lower-than-expected production (-5.2% MoM) against our +2.2% MoM estimate as production from all three regions declined likely due to shorter working month. Exports were flat (-0.8% MoM) as weaker China (-23% MoM), India (-20% MoM) were offset by stronger EU (+44% MoM), and Turkey (+25x MoM).

Forecasting August 2021 production to recover (+7.0% MoM) to 1.63m MT. On top of Hari Raya Haji, we note that there were multiple holidays in July for Penang, Perlis, Terengganu, Sarawak and Pahang. We expect production to resume its uptrend in August with a 7% MoM increase.

Exports to rise (+3.2% MoM) to 1.45m MT in August 2021. Data from cargo surveyors for 1st – 10th August showed an average decline of 11.5% MoM. However, we expect exports to improve (+3.2% MoM) on continued inventory replenishment activities from China and India. Both China and India’s palm oil inventory level (as at July 2021) are at multi-year lows, while India’s recent refined palm oil import restriction removal should encourage further imports.

August 2021 inventory to remain flat (-0.5% MoM) to 1.49m MT as total supply of ~1.72m MT is offset by total demand of ~1.73m MT. The key factors to continue focusing on in the coming months are: (i) peak season production strength, (ii) stockpiling activities by India and China, (iii) labour situation and 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. However, the sector lacks catalyst. Our integrated pick with defensive overall margin against 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 - 12 Aug 2021