Regional Plantations - Maybank Kim Eng 2020-02-12: COVID-19 Unlikely To Affect Demand Of Staple Food, But …

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Regional Plantations - COVID-19 Unlikely To Affect Demand Of Staple Food, But …

The present low CPO output and stockpile has helped recoup some earlier CPO price loss due to concern over COVID-19’s impact on demand. Much uncertainty remains on COVID-19’s impact although historical data shows past few diseases did not dampen the global demand of 17 Oils & Fats.
Our base case is relatively resilient edible oils demand as it is a staple food. However, if the situation deteriorates quickly, sentiment will turn negative again.

Maintain NEUTRAL on the sector. Our small cap BUYs are Bumitama Agri (SGX:P8Z), Boustead Plantations and TH Plantations. We keep our MYR2,300/t 2020 CPO ASP est.

China is the world’s largest consumer of 17 Oils & Fats (O&F) at 38mt in 2018 or 17% of global consumption; it has grown at a CAGR of 3.9% since 2000. Meanwhile, China’s palm oil consumption has stagnated to between 5.11mt to 6.29mt p.a over 2006 until 2018, and it accounted for just 8% of China’s total O&F consumption in 2018 (2006A: 15%).
It is too soon to conclude that COVID-19 will significantly dampen China’s demand for palm oil and 17 O&F as historical data shows that global annual consumption growth has been uninterrupted since 2000 despite the few major disease outbreaks in the past.

Concern over MPOB’s Jan 2020 low palm oil output and stockpile has somewhat helped CPO price recover after CPO 3M Futures posted a 10% drop in price on 28 Jan alone to MYR2,575/t (or -MYR286/t). The market opines that the COVID-19 epidemic resembles that of SARS-CoV in 2003. But compared to SARS-CoV, COVID-19 is not as lethal but far more contagious with infected individuals now over 40,000 . However, there is still much more to learn about the transmissibility, severity, and other characteristics associated with COVID-19.
What we know is that the reported numbers of cases and deaths are still rising rapidly by the day. If China’s unprecedented lockdown and quarantine measures prove ineffective, and this epidemic turns pandemic and extends beyond the summer months of the Northern Hemisphere, sentiment will likely turn more negative by then.

Our base case scenario is relatively resilient edible oils demand as it is staple food. This assumes the epidemic, and the number of sick people and deaths remain under control. In fact, there may be greater demand of edible oils at the onset of the outbreak as panic buying may cause consumers to stock up on basic food supplies.
There will also be increased demand for personal hygiene products such as hand wash and soap, which has palm oil. However, our immediate concern on palm oil is possible contract default or renegotiation of contract terms by the Chinese and Indian buyers given that CPO price has been very volatile of late and has been trending downwards since the start of 2020. But thus far, we have yet to hear of any contract defaults.

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-02-12

SGX Stock Analyst Report BUY MAINTAIN BUY 0.800 SAME 0.800

HOLD MAINTAIN HOLD 1.860 SAME 1.860

NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000