In a research report dated 20 Jan, Macquarie Equities Research (MQ Research) revised the crude palm oil (CPO) price projection to USD750/mt from USD610/mt, in an anticipation that the vegetable oil complex will continue to shrink for two year in a row. MQ Research also expected that the CPO price should improve this year with supports by stronger fundamentals.

Prone to headline risks but stronger fundamentals remain intact

• CPO price rebounded strongly in 4Q19 and broke the RM3,000/mt level in January 2020 after strong data were released by Malaysian Palm Oil Board (MPOB) starting from October 2019. MQ Research believes the CPO price will remain elevated at c.RM3,000/mt as majority of the vegetable oil complex tightens for the second consecutive year in CY20E, particularly CPO and soybean oil. MQ Research revised its CY20E CPO price forecast to USD750/mt from USD610/mt previously.

• In 1H20 MQ Research should see further inventory drop in Malaysia and Indonesia as MQ Research believes demand will exceed supply due to lower production. Festive season i.e. CNY, Ramadhan and Eid will all happen in 1H20 and therefore should impact production. Further, due to CPO seasonality, whereby the yields in 1H are lower than those of 2H, should support the case for further tightening of CPO stock-to-usage (S/U) ratio. The continued dry weather in Kalimantan, Indonesia, should also be supportive of CPO prices.

• India’s ban on refined palm oil could bring downward pressure to CPO price. India’s ban on refined palm oil from Malaysia and Indonesia is likely to put a pressure on refined palm oil price vs. crude palm oil. While there are China and Pakistan who could emerge as the ready off-taker to mop up the residue left by India, this development could bring volatilities to CPO price.
• US – China trade deal is unlikely to bring significant impact in a short time. MQ Research believes trade agreement between US and China will still hinge on pricing. MQ Research’s particular interest in the trade deal is soybean. MQ Research believes China will honour the volume that it would export, provided that pricing are sensible. MQ Research saw China going back to Brazil for soybean imports in December after the premium on US soybeans widened ahead of the trade agreement signing. Further Brazil is set to have a bumper crop year in 1H20; cheaper prices could keep China buying from its South American suppliers.

Focus on CPO price leverage players; top pick in Malaysia is SDPL

• Sime Darby Plantation (SDPL MK, RM5.31, Outperform, TP: RM6.00, raised from RM5.30). Management will focus on cutting operating costs further in FY20E. Sime Plant has a high operating leverage and EPS is sensitive to CPO price. Further cost cuts should improve margins in FY20E onwards.

Outlook

• CPO price should remain elevated, underpinned by stronger fundamentals.

12-month Target Price Methodology

• SDPL MK: RM6.00 based on a discounted cash flow

Source: Macquarie Research - 28 Jan 2020