Review of August figures:

August inventory of 1.87m MT (+25.3% MoM) came above both our/consensus’estimates. Deviation was mainly due to lower-than-expected exports from: (i) China (-16% MoM), (ii) EU (-49% MoM), (iii) Turkey (-33% MoM), and Vietnam (-58% MoM). Production came in at 1.70m MT (+11.8% MoM) against our 1.63m MT (+7.0% MoM) estimate.

Our projection for September:

For September, we forecast: (i) production to continue its uptrend (+5.7% MoM), and (ii) exports to surge (+34.2% MoM) on inventory replenishment activities from China and India, as well as a pickup in EU. Both China and India’s palm oil inventory level remains relatively low. Data from cargo surveyors for 1st – 10th Sep have shown an average 56% MoM increase. All in, we expect total supply to outstrip total demand, leading to higher inventory of 1.91m MT (+2.0% MoM).

Our thoughts on the sector:

August MPOB data isbearish for CPO prices and we expect CPO prices to trend lower, especially with narrowing SBO-CPO premium. ESG concerns continue to weigh on the sector, but valuations of planters under our coverage and KLPLN index (- 1.5SD from mean) seem to have priced in the bulk of the negatives. Moving forward, the prevailing key factors remain: (i) labour situation and movement restriction developments (Malaysia’s transition to reopening/recovery), (ii) peak season production strength, (iii) stockpiling activities by India and China, (iv) supply-demand dynamic of soybean market, and (v) biodiesel mandates. Stay NEUTRAL on the plantation sector with an unchanged CY21 CPO price forecast of RM3,700/MT. Integrated players like KLK (OP; TP: RM23.60) with defensive overall margin against CPO price variability, and GENP (OP; TP: RM8.40) with a laggard and reopening/recovery angle appeal to us.

August 2021 CPO inventory surged (+25.3% MoM) to c.1.87m metric tons (MT). This is above both our/consensus’ estimates of 1.49m/1.74m MT (-0.5%/+16.3% MoM), respectively. The deviation from ours is due to: (i) lower-than-expected export (-17.1% MoM) against our +3.7% MoM estimate, mainly from weaker: (i) China (-16% MoM), (ii) EU (-49% MoM), (iii) Turkey (-33% MoM), and Vietnam (-58% MoM). Production came in at 1.70m MT (+11.8% MoM) against our 1.63m MT (+7.0% MoM) estimate.

Forecasting September 2021 production to rise further (+5.7% MoM) to 1.80m MT. We expect continued growth from all regions (Peninsular and East Malaysia), with production likely to peak in Sep-Oct. Majority of planters concur with our view.

Exports to jump (+34.20% MoM) to 1.56m MT in September 2021. Data from cargo surveyors for 1st – 10th September showed an average increase of 56% MoM. We believe this is led by inventory replenishment activities from China and India, as well as a pickup in EU. Both China and India’s palm oil inventory level remains relatively low.

September 2021 inventory to creep higher (+2.0% MoM) to 1.91m MT as total supply of ~1.89m MT outstrips total demand of ~1.85m MT. The key factors to continue focusing on in the coming months are: (i) labour situation and movement restriction developments given the Malaysian government’s transition to reopening/recovery, (ii) peak season production strength, (iii) stockpiling activities by India and China, (iv) supply-demand dynamics of soybean market, and (v) biodiesel mandates fulfilment.

Stay NEUTRAL on the plantation sector with CY21 CPO price forecast of RM3,700/MT. The August MPOB data is bearish for CPO prices. We expect CPO prices to trend lower from current elevated levels, especially with narrowing SBO premium to CPO of USD124/MT (vs. Aug-2021 average of USD281/MT). Meanwhile, ESG concerns continue to weigh on the sector, but 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 CPO price variability is KLK (OP; RM23.60). We think GENP (OP; RM8.40) offers a laggard angle, with share price up merely 12% (vs. SIMEPLT’s +20%), while providing reopening/recovery prospects through its premium outlets.

Source: Kenanga Research - 13 Sept 2021