MIDF Research does not discount the possibility that demand from India to trend lower post the restocking activities.
KUCHING: Outlook remains less-than-optimistic for plantation sector players with various factors in play suppressing the prices of crude palm oil (CPO).
This comes as Malaysia’s July 2019 palm oil stockpiles rose by eight per cent year on year (y-o-y) to 2.4 million metric tonnes (MT), which came in lower than both Bloomberg and Reuters consensus estimates.
The monthly inventory level has been on the rise on a year-over-year basis for the past 25 months since July 2017. This was mainly attributable to the higher production level as the palm oil industry enters into its high production period – between July to October – which offset the higher export demand.
Meanwhile, on a monthly basis, it recorded a marginal decline of 0.8 per cent month on month (m-o-m), the slowest decrease recorded since March 2019.
Moving forward, MIDF Amanah Investment Bank Bhd (MIDF Research) was of the view that the expected higher output in coming months to add pressure on inventory level which will continues to suppress CPO price.
“The higher CPO output suggests that the palm oil industry has entered into its seasonal high production period which typically falls between August and October. This would continue to impede the Malaysian CPO inventory drawdown amidst the weaker demand prospects in second half of the year,” it said in a sector outlook yesterday.
“Should export demand not able to keep pace with the production level, we may see the stockpiles to rebound to above 2.4 million MT level. Note that Indonesia has been actively engaging with the Indian government to lobby for the same preferential tariff treatment as Malaysia.
“If that materialises, it would have negative repercussions on the Malaysian CPO environment as India is currently our main engine for export demand growth due to the preferential trade agreement which has largely helped to ease the inventory level thus far.”
In addition, MIDF Research does not discount the possibility that demand from India to trend lower post the restocking activities.
“We also opine that the increasing supplies of cheaper Indonesian palm oil may be the primary factor of weaker-than-expected export demand for Malaysian palm oil which could continue throughout the second half of the year.
“Coupled with the CPO output in overdrive mode and potential rebound in stockpiles level, we are maintaining our negative stance on the sector with an unchanged 2019 CPO price target of RM2,090 per MT.”
Separately, Kenanga Investment Bank Bhd (Kenanga Research) observed that thus far, CPO price recovered from a low of RM1,864 per MT in early July due to recent positive developments such as China’s proposed removal of import quota for palm oil, potentially marking its commitment to import more CPO.
However, with production likely to pick up and peak in October or November this year, they believed this would cap further upside to CPO prices.
“All in, we believe CPO price will continue to remain range-bound — between RM1,900 to RM2,100 per MT — in the second half of 2019 (2H19),” it said in a separate note, keeping its underweight call on the sector.
“We believe planters’ earnings will continue to hit a rough patch in the coming quarter with 2QCY19 average CPO price at RM1,978 per MT, which should mask any pick-up in production.
“As such, we are maintaining our CY19 CPO price forecast of RM2,000 and our underweight stance on the sector. However, should there be stronger-than-expected demand from China arising from the ban of US agricultural products, resulting in falling stockpiles in the remaining 2H19 and sharp recovery in CPO prices, we would review the call and TP of planters under our coverage.”
Affin Hwang Investment Bank Bhd (AffinHwang Capital) still expect the global palm oil inventory to gradually decline going forward with higher exports and higher consumption of palm-oil products.
“Stronger exports and consumption will likely be supported by the energy and food sectors, in our view. Malaysia’s biodiesel exports increased by 35.4 per cent y-o-y to 367,000MT in the first seven months of 2019.”
AffinHwang Capital also maintained its neutral call on the sector and stayed selective on certain stocks.
“Across our coverage, we have buy ratings on Ta Ann Holdings Bhd, IJM Plantations Bhd, Hap Seng Plantations Bhd and WTK Holdings Bhd; hold ratings on Felda Global Ventures Bhd IOI Corporation Bhd, Sime Darby Plantation Bhd, Genting Plantations Bhd and KL Kepong Bhd; and a sell rating on Jaya Tiasa Holdings Bhd.
“For plantation-sector exposure, we still prefer Ta Ann for its good plantation earnings prospect, given its rising matured planted area and improving FFB yield and CPO oil extraction rate.”