Plantation - RHB Invest 2020-12-11: An Early Start To The Low Season

BUMITAMA AGRI LTD. (SGX:P8Z) FIRST RESOURCES LIMITED (SGX:EB5) WILMAR INTERNATIONAL LIMITED (SGX:F34) GOLDEN AGRI-RESOURCES LTD (SGX:E5H)

Plantation - An Early Start To The Low Season

Maintain NEUTRAL on Plantation sector with top picks: Wilmar International (SGX:F34), First Resources (SGX:EB5), Sarawak Oil Palms and Kuala Lumpur Kepong.
Malaysia’s production fell further in November, an early start to the low season. We expect output to remain weak until 1Q21, thereby buoying CPO prices, before improving in late-2Q21 – leading to a moderation in prices.

YTD-Nov 2020 output: -3.9% y-o-y. M-o-m, production dropped across the nation, with Peninsular (-14.5%) taking the lead, followed by Sabah (-13.8%) and Sarawak (-10.7%).
Exports fell 22.2% m-o-m in Nov 2020, bringing year-to-date exports to -7.6% y-o-y. This was due to declines from India (-52% m-o-m) and Bangladesh (-66% m-o-m), but slightly offset by an increase from China (58% m-o-m).
Inventory levels dropped to 1.56m (-0.6% m-o-m) in Nov 2020, the lowest in three years. Annualised stock/usage ratio remained at 7.6% – below the 15-year historical mean of 9.8%. We expect stock levels to remain low in Dec 2020 and into 1Q2021 as production remains in low season.

The recent change in Indonesian export levies also provided confidence that the biodiesel mandate will be met, thus pushing prices up further. However, demand degradation from the high prices is a concern, with CPO now at a USD40.00/tonne premium to SBO;

China’s CPO stock levels have recovered somewhat, down 23% y-o-y in November, while soybean stock levels remained high. China’s CPO imports from Malaysia fell 11% y-o-y but rose 58% m-o-m in November. Given the price premium however, demand from China could moderate in the near term.

Stock levels remained low in India (Nov 2020: -53% y-o-y), with the newly lowered CPO import duties of 27.5% (from 37.5%) taking effect from end- November. We expect CPO imports to rise in Dec 2020, after falling 52% m-o-m in Nov 2020, particularly since duties on SBO were kept at 35%.

We saw above expectation results this quarter, with 7 companies beat, 4 in line and 4 missed. This was due to the leverage of higher CPO prices and downstream margins in Indonesia. This was offset by weaker-than-expected FFB output in Indonesia, with the pure Indonesian companies seeing a drop in output of c.7.5% y-o-y in 3Q20 vs -1.7% for the Malaysian companies.
Indonesian output has started to pick up since Sep 2020 and is expected to peak in November, while Malaysia’s peak is over. This, together with still strong CPO prices should ensure another good quarter for planters in 4Q20.

While we expect prices to remain buoyant until 1Q21 on low stock levels and the low output season, we believe prices would moderate from late-2Q20, as productivity improves.
Risks include: La Nina impact worsening in South America, crude oil prices reversing its trend, Malaysian labour shortage exacerbating, and rising ESG concerns.
See PDF report attached below for more statistics and also the regional plantation stocks' peer comparison.

Hoe Lee Leng RHB Securities Research | Christopher Andre Benas RHB Invest | Juliana Cai RHB Invest | https://www.rhbinvest.com.sg/ 2020-12-11

SGX Stock Analyst Report BUY MAINTAIN BUY 0.600 SAME 0.600

BUY MAINTAIN BUY 1.450 SAME 1.450

BUY MAINTAIN BUY 5.800 SAME 5.800

SELL MAINTAIN SELL 0.134 SAME 0.134