Regional Plantations - Maybank Kim Eng 2020-06-22: Anticipate Moderate Global Supply Of Palm Oil And Oils & Fats (O&F)

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

Regional Plantations - Anticipate Moderate Global Supply Of Palm Oil And Oils & Fats (O&F)

We suspect investors will soon switch their focus on seasonally high production figures after current excitement over pent up demand fizzles out. Stockpile will remain reasonable in 2H20. Global supply of palm oil, and O&F will likely remain in moderate supply in 2019/20F, and also in 2020/21F.
We maintain our MYR2,300/t CPO ASP forecast for 2020, and sector NEUTRAL call. Values can be found among the SMID caps, which trade at or near GFC trough PBV (see our sector report: Regional Plantations - Maybank Kim Eng 2020-05-13: Stockpile At 5-month High).

Preferred BUYs are First Resources (SGX:EB5), Bumitama Agri (SGX:P8Z), Sarawak Oil Palms, Ta Ann and Boustead Plantation. SELL Genting Plantations and IOI Corp.

Since our initial COVID-19 report on 12 Feb, the disease turned pandemic in a matter of weeks and led to lockdown in many countries across the globe. IMF projects a global recession and according to Oil World’s latest forecasts, the world’s consumption of oils & fats (O&F) is going to decline y-o-y for the first time ever.
Exports of palm oil, the most widely traded and consumed vegetable oils, were severely affected during the Feb-May 2020 period. Fortunately, this was offset by palm oil’s low output over the same period due to biological tree rest and lack of fertilizer applications in recent years.
Post lockdown, the market is now anticipating some pent up demand as stockpile at destination markets (especially India) are low. Oil World revised up its Oct/Sept 2019/20F marketing year stock-to-usage ratio (SUR) projection for palm oil to 18.0% (Dec 2019: 14.5%) and global 17 oils and fats to 13.5% (Dec 2019: 11.7%) which imply moderate supply (Dec 2019: tight supply). However, this contrast with still ample supply of global 10 oilseeds.

Oil World has also just released its preliminary demand and supply forecasts for Oct/Sept 2020/21F marketing year for global 17 O&F. Following reduced estimates for 2019/20F, it is now anticipating a recovery in demand (+2.8% y-o-y) and supply (+3.5% y-o-y) in 2020/21F. The SUR of 2020/21F will be marginally higher at 13.6% (+0.1-ppts y-o-y) on production surplus (ie production exceeding consumption).

We believe Malaysia’s zero CPO export duty exemption (to help boost exports to India), and Indonesia’s restructured export taxes and lower processor subsidy to keep its CPO Fund well-funded will help keep 2H20 stockpile in check. These, in turn, will be supportive of CPO price. Hence, we are now less negative of 2H20 CPO price outlook (even as we enter into seasonally higher production months), expecting price to trade between MYR2,000-2,400/t in 2H20.
While Brent crude oil price has recovered somewhat in recent weeks, the POGO spread remains unfavourably wide at ~USD230/t, which will cap further upside in CPO price.
Likewise, the recent CPO price gain has narrowed its discounts vis-a-vis US soyoil (USD57/t), Argentina soyoil (USD149/t), and Germany rapeseed oil (USD349/t) to mostly within historical levels.
See attached 15-page PDF report for complete analysis.

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-06-22

SGX Stock Analyst Report BUY MAINTAIN BUY 1.850 SAME 1.850

BUY MAINTAIN BUY 0.780 SAME 0.780