Regional Plantations - Maybank Kim Eng 2019-04-11: Stockpile Dips Below 3m MT

Regional Plantations - Maybank Kim Eng Research | FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z)

Regional Plantations - Stockpile Dips Below 3m MT

Expect further drawdown in stockpile in 2Q19

  • Malaysian Palm Oil Board (MPOB)’s stockpile dipped below 3m MT for the first time since Oct 2018 on stronger exports. We maintain our view that CPO price will strengthen towards mid-year as stockpiles are set to decline further on healthy exports and low output in 2Q19. This offers a tactical trading opportunity in 2Q19 although our 12M NEUTRAL view on the sector is unchanged.
  • Our BUYs are FIRST RESOURCES LIMITED (SGX:EB5), BUMITAMA AGRI LTD. (SGX:P8Z), Ta Ann and Sarawak Oil Palms.

Stockpile drawdown resumes in March

  • Malaysian Palm Oil Board’s (MPOB) Mar 2019 stockpile fell 5% m-o-m to 2.92m MT (+26% y-o-y), but slightly above market estimates of 2.87m MT. The drawdown in stockpile was due to a pick-up in exports (1.62m MT; +22% m-o-m, +3% y-o-y) and domestic consumption (0.33m MT; +25% m-o-m, +62% y-o-y) while output grew by only +8% m-o-m to 1.67m MT (+6% y-o-y).
  • If we were to adjust for the longer calendar days in March (vs shorter February month), the daily output in the month of March effectively fell m-o-m. Nonetheless, on an absolute basis, March’s output of 1.67m MT is still the highest for the month of March (which we attribute to the recent change in cropping pattern).
  • Exports to most key markets were stronger m-o-m with the exception of India (due to high base in Feb 2019), EU, USA and Bangladesh.

Expect April’s inventory at 2.65m-2.75m MT

  • The preliminary Malaysian export estimates for shipments in the first 10 days of April by Amspec and Intertek (independent cargo surveyors) indicate a growth of +6.2%/ +12.8% m-o-m to 481,425/ 490,435 MT. While still early into the month, the preliminary estimates look promising.
  • Demand may be potentially sustained ahead of Ramadan, with Raya celebration on the 5-6 June, approximately 10 days earlier than a year ago. This should lead to further drawdown in stockpile to between 2.65m-2.75m MT by end-April, we estimate.

Time for a trade in 2Q19

  • The much anticipated slowdown in Malaysia’s production (during this seasonally low output period) has been largely pushed back to 2Q19. As exports continue to look promising in April, we expect CPO price to resume its recovery in the current quarter.
  • As for CPO price, downside will be limited by the wider-than-usual price discounts of palm oil against Argentina soyoil and EU (Germany) rapeseed oil, and still high Brent crude oil price.
  • As we enter into the summer months in the Northern Hemisphere, the discretionary demand for palm biodiesel could make a return as the current POGO spread makes economic sense even without subsidies. Indonesia (and to a lesser extend Malaysia) remains the pillar of CPO price support as the government’s B20 mandate goes full-steam in 2019, supported by its CPO Fund exceeding USD1.0bn at the start of 2019 (i.e. enough to subsidise its B20 programme for the entire year). The odds therefore favour a trade in 2Q19.

Ong Chee Ting CA Maybank Kim Eng Research | 2019-04-11
SGX Stock Analyst Report BUY MAINTAIN BUY 2.030 SAME 2.030