Regional Plantations - Maybank Kim Eng 2020-02-11: Jan2020 Stockpile At 29-Month Low

GOLDEN AGRI-RESOURCES LTD (SGX:E5H) BUMITAMA AGRI LTD. (SGX:P8Z) FIRST RESOURCES LIMITED (SGX:EB5) INDOFOOD AGRI RESOURCES LTD. (SGX:5JS)

Regional Plantations - Jan2020 Stockpile At 29-Month Low

MPOB’s Jan 2020 stockpile of 1.76mt (-13% m-o-m, -42% y-o-y) is the lowest since Aug 2017. Fundamentally, the tight stockpile should support lofty CPO price in the near term but concern over 2019-nCoV is likely to keep CPO price upside in check.
Our 12M NEUTRAL view on the sector is unchanged as the valuation of large caps already reflects CPO ASP of MYR2,300/t, our estimate for 2020. Nonetheless, we upgrade Bumitama Agri (SGX:P8Z) to BUY (from HOLD) given recent share price weakness – potential total return of 21%.

Our other small cap BUYs are TSH Resources, Boustead Plantations and TH Plantations. Boustead Plantations and TH Plantations are restructuring plays and beneficiaries of CPO price upswing.

MPOB’s Jan 2020 stockpile declined for the fourth consecutive month to 1.76mt, slightly below market estimates of 1.78mt. The steep drawdown in stockpile was primarily due to a seasonal sharp m-o-m decline in output to 1.17mt (-13% m-o-m, -33% y-o-y) which was lower than exports of 1.21mt (-13% m-o-m, -28% y-o-y).
M-o-m, exports were down to most major destinations except EU (+27% m-o-m, -25% y-o-y), Pakistan (+88% m-o-m, +112% y-o-y), Philippines (+70% m-o-m, flat y-o-y), USA (+67% m-o-m, -13% y-o-y) and Bangladesh (+ >100% m-o-m, + >100% y-o-y).

The preliminary Malaysian export estimates for shipments in the first 10 days of February by Amspec, Intertek and SGS (independent cargo surveyors) indicate a 20% / 27% / 29% m-o-m decline to 364,456t / 343,409t / 323,341t respectively. The preliminary export estimates decline in February is not a surprise to us as demand from China has likely cooled off post CNY demand coupled with extended China port closures in the first week of February due to the 2019-CoV epidemic.
Furthermore, India’s tough stand on Malaysian palm oil origin likely stretched into Feb 2020 amidst uncertainty over the imposition of restriction on refined palm oil (announced on 8 Jan).
Finally, Malaysia’s higher CPO export tax rate of 6.0% in February (Jan: 5.0%) will act as a deterrent too, as exporters will have to bear higher taxes (despite recent lower CPO prices), preferring to defer exports into March.

The anticipated lower exports in February will likely be matched by still weak output, which may result in flat-to-lower m-o-m February stockpile. As palm oil stockpile remains tight, CPO price will likely to stay lofty in 1Q20 to ration demand. This is despite CPO price trading at a narrow discount of just USD19/t to US soyoil on 7 Feb (vs historical average of USD150/t.
Discretionary demand for palm biodiesel will also remain elusive as palm oil trades at a USD285/t premium (7 Feb) to gasoil in Rotterdam .
We expect CPO price correction to set in somewhere in 2Q20 when output recovers. We are keeping our 2020-21 CPO ASP forecasts of MYR2,300/t and MYR2,400/t.

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-02-11

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HOLD MAINTAIN HOLD 1.860 SAME 1.860

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