Regional Plantations - Maybank Kim Eng 2020-10-13: Low Sept Stockpile Supportive Of CPO Price For Now

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

Regional Plantations - Low Sept Stockpile Supportive Of CPO Price For Now

Fearing a strong Indonesian output recovery in 4Q and 2021

  • Healthy September exports have helped kept Malaysia’s stockpile low, aided by zero CPO export levy and weak 3Q20 Indonesian output. We believe a relatively stronger 4Q20 Indonesian’s FFB output recovery may cap near term CPO price upside.
  • Still, there is upside risk to our 2020’s CPO ASP of MYR2,400/t (YTD: MYR2,589/t) but this is priced in, in our view.
  • Next year, given expectation of a strong output recovery post biological tree stress in Indonesia, aided by anticipated good rainfall due to La Nina, we are keeping our CPO ASP est. of MYR2,400/t.
  • Our sector NEUTRAL call is unchanged.
  • BUYs remain with First Resources (SGX:EB5), Bumitama Agri (SGX:P8Z), Sarawak Oil Palms and Boustead Plantations.
  • SELL IOI Corp and Genting Plantation.

Still tight September stockpile at 1.73mt

  • MPOB’s Sept 2020 stockpile of 1.73mt (+1% m-o-m, -30% y-o-y) came in within street estimates. The relatively flattish m-o-m stockpile was mainly due to flattish output of 1.87mt (flat m-o-m, +1% y-o-y) that was matched (in absolute terms) by a combination of marginally higher exports of 1.61mt (+2% m-o-m, +14% y-o-y), lower domestic consumption of 0.28mt (- 7% m-o-m, -4% y-o-y) and higher imports (+49% m-o-m, -32% y-o-y).
  • The marginally higher m-o-m September exports were due to higher exports to several major destinations, namely India (+14% m-o-m, +21% y-o-y), Philippines (+51% m-o-m, -1% y-o-y), Turkey (+77% m-o-m, +178% y-o-y), USA (+11% m-o-m, +50% y-o-y), and Bangladesh (+1755% m-o-m, -18% y-o-y).

Prelim. est. for Oct exports on track to be flat m-o-m

  • The preliminary Malaysian export estimates for shipments in the first 10 days of October by Amspec and Intertek (independent cargo surveyors) were 535,552t / 529,462t (+13% / +12% m-o-m) respectively. When calendarised for the month of October, the absolute export figure is on course to be in the region of ~1.5-1.6mt.
  • By our preliminary estimates, October’s stockpile is likely to inch higher to ~1.82mt.

High CPO price is likely to hurt ID’s B30 mandate

  • 3Q20’s crop output has been weak in Indonesia due to the lagged effects of a mini-drought there in 3Q19. This was compensated by relatively lofty CPO price in 3Q20 which averaged MYR2,771/t (+37% y-o-y, +22% q-o-q) to compensate for the region’s weak output. Nonetheless, we expect Indonesia to finish the year with stronger output in 4Q20, and hence a possible price correction.
  • The single biggest concern we have is the huge premium that palm oil price has developed over diesel with the POGO spread at USD423/t (9 Oct 2020), a multi-year high.
  • At current spread, the subsidy required for Indonesian’s B30 mandate is even higher than the diesel price itself. Markets will inevitably question the sustainability of Indonesia’s B30 mandate as the current CPO Fund is unlikely to sustain its B30 mandate beyond the coming few weeks if the spread remains huge and without further government subsidies/ support.
  • In addition, the 3M CPO price is trading at a narrow discount to US soyoil (USD46/t vs historical average of USD150/t). Although it is trading at a wider discount against Germany rapeseed oil at USD266/t in EU, it is nonetheless narrower than the historical average of USD291/t.
  • See peer comparison table in PDF report attached below.

Ong Chee Ting CA Maybank Kim Eng Research | 2020-10-13
SGX Stock Analyst Report BUY MAINTAIN BUY 1.790 SAME 1.790