Regional Plantations - Maybank Kim Eng 2019-07-11: Inventory Inflated By Imports

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

Regional Plantations - Inventory Inflated By Imports

Fundamentals are improving as should CPO price

  • Had it not been for higher imports in 1H19, June’s inventory levels would have been flat y-o-y. Exports and consumption outpaced output in 1H19 which has resulted in a 25% drawdown in stockpiles since the start of 2019.
  • Fundamentals are improving, supporting higher CPO prices ahead, in our view. However, we believe current share prices of Malaysia big-caps have largely reflected a recovery in CPO price over the near-term; we prefer the bombed out small-mid caps in Malaysia and the Singapore listed stocks.
  • Our BUYs are First Resources and Bumitama Agri, Ta Ann & Sarawak Oil Palms.

June stockpile at 11-month low

  • As reported by the Malaysian Palm Oil Board (MPOB), June 2019 stockpiles fell 1% m-o-m (+11% y-o-y) to 2.42mt (million tonnes), slightly above market estimates of 2.37mt mainly due to unexpectedly higher palm oil imports. Due to the week-long Eid al-Fitr celebration in early June, production fell 9% m-o-m (+14% y-o-y) to 1.52mt. This was matched by lower exports post-Ramadhan of 1.38mt (-19% m-o-m, +22% y-o-y) and lower domestic consumption of 0.26mt (-14% m-o-m, -4% y-o-y). The key surprise was higher imports of 0.1mt (+64% m-o-m, +18% y-o-y).
  • In fact, the higher imports recorded in 1H19 inflated the stockpile reported by MPOB. Without the higher imports recorded in 1H19 at 0.53mt (+80% y-o-y), June 2019’s stockpile would have been lower at 2.19mt (flat y-o-y).
  • Despite higher imports, the reported stockpile has fallen 25% YTD to 2.42mt (Dec 2018: 3.22mt). This was due to strong exports of 9.38mt (+14% y-o-y) and higher domestic consumption of 1.74mt (+14% y-o-y) in 1H19 which outpaced production of 9.79mt (+10% y-o-y).

Weak preliminary exports estimates for July

  • The preliminary Malaysian export estimates for shipments in the first 10 days of July by Amspec, Intertek and SGS (independent cargo surveyors) indicate a decline of 2%/1%/3% m-o-m to 367,950/373,330/366,242t. The preliminary estimates look relatively weak considering the corresponding period last month was affected by the Eid al-Fitr celebration.
  • While still early days, we need to see a pick-up in exports for the remainder of July to be certain inventories have been kept in check.

Expect stronger CPO prices in 2020-21

  • Despite a 25% decline in stockpile levels in 1H19, the CPO spot price has fallen 4.5% YTD to MYR1,865/t (as at 9 July). At this level, we believe it is trading precariously near the industry’s cost of production.
  • The upcoming 2Q19 results/earnings release will likely show more planters struggling to remain in the black. We believe the low CPO price is unsustainable considering the wider-than-usual discounts to competing oils, like EU (Germany) rapeseed oil and Argentine soy oil; the CPO price needs to increase to close the price gap.
  • Furthermore, the low CPO price will force planters, especially smallholders, to conserve cash by further cutting fertilizing applications. This will eventually translate into lower output for the industry in 2020-21, and higher CPO prices.

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-07-11
SGX Stock Analyst Report BUY MAINTAIN BUY 1.930 SAME 1.930