Regional Plantations - Maybank Kim Eng 2019-05-13: Easing Inventory Pressure

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

Regional Plantations - Easing Inventory Pressure

Lower inventory expected during next two months

  • Inventories eased during April, but the change was within market expectations. We expect further easing in May and June as output declines due to low productivity during Ramadan. Fundamentals are improving, supporting higher CPO price ahead.
  • Our 12M NEUTRAL view on the sector is unchanged, although long funds should consider taking the opportunity to accumulate bombed out small-mid caps during this down-cycle in anticipation of better CPO price in the years ahead.
  • Our BUYs are FIRST RESOURCES LIMITED (SGX:EB5), BUMITAMA AGRI LTD. (SGX:P8Z), Ta Ann and Sarawak Oil Palms.

Second month of inventory decline

  • Malaysian Palm Oil Board’s (MPOB) April 2019 stockpile fell 6% m-o-m to 2.73mt (million tonnes) (+25% y-o-y), broadly in line with market estimates of 2.75mt. The stockpile drawdown was due to a pick-up in exports (1.65mt; +2% m-o-m, +8% y-o-y), while output was marginally lower at 1.65mt (-1% m-o-m, +6% y-o-y) and imports fell 53% m-o-m to 0.062mt (+74% y-o-y).
  • Higher exports were recorded to China, India, Bangladesh and the Philippines. Domestic consumption fell 24% m-o-m to 0.25mt (+20% y-o-y).

Low Ramadan productivity to help ease supply

  • The preliminary Malaysian export estimates for shipments in the first 10 days of May by Amspec, Intertek and SGS (independent cargo surveyors) indicate growth of 14.4%/12.7%/6.4% m-o-m to 550,785/552,640/559,545t (tonnes). While still early into the month, the preliminary estimates look promising.
  • Meanwhile, the holy month of Ramadan commenced on 6 May. Productivity may be affected somewhat in May-June during the fasting month and as some workers (especially Indonesians) prepare to travel home for a longer break for the Eid al-Fitr celebration on 5-6 June. Output is likely to hit a low for the year in June 2019.
  • Recall that in June 2018, output was at a year low of 1.33mt (million t). By our estimate, this should lead to further drawdown in inventory to between 2.50m- 2.60mt by end-May, and even lower by end-June.

Look beyond current down cycle

  • The slowdown in Malaysia’s output is taking shape, albeit slowly. We stand by our earlier view (see report: Regional Plantations - 2019, A Year Of Price Recovery) that 2019’s output growth will slow from 2Q19 as oil palm trees in the region enter into biological rest mode after nearly 2-years of good harvest post the last major El Nino, and due to a lack of fertilizing work by smallholders in 2H18 on poor CPO prices.
  • Meanwhile, CPO price downside would 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.
  • Discretionary demand for palm biodiesel could increase during the summer months of the Northern Hemisphere as the current POGO spread makes economic sense even without subsidies.
  • We are keeping our 2019 CPO ASP forecast of MYR2,350/t for now while failure of spot CPO price to recover by mid-year may necessitate a review.

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-05-13
SGX Stock Analyst Report BUY MAINTAIN BUY 2.03 SAME 2.03