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

FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z)

Regional Plantations - Inventory Inflated By Imports

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.

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).

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.

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

BUY MAINTAIN BUY 1.010 SAME 1.010