KUALA LUMPUR (July 13): Analysts have maintained their "neutral" stand on the plantation sector after the Malaysian Palm Oil Board (MPOB) reported data for June with month-end stockpiles declining slightly more than expected by 6.3% month-on-month (m-o-m) to 1.9 million tonnes.

Kenanga Research said the June 2020 crude palm oil (CPO) inventory was below its estimate of 2.04 million metric tons (+0.3% m-o-m) but within the consensus estimate of 1.94 million metric tons (-4.6% m-o-m). 

It said it forecasts a dip in July 2020 production to 1.85 million metric tons, given the significant spike in June production, as the research house believes it has seen the "mini-peak". 

“We believe June’s export spike was mainly fuelled by India and China’s inventory replenishment efforts, alongside a 0% palm oil export tax for June-December 2020 (making Malaysian palm oil more competitive than Indonesia's). 

“Moving forward, we expect pent-up demand to gradually fizzle out, especially as we expect China to ramp up US soybean purchases to honour the US-China Phase 1 trade deal. Taking all these into consideration, we forecast exports to decline 9.4% m-o-m to 1.55 million metric tons in July 2020,” said Kenanga in a note today. 

All in, the research firm expects a total supply of 1.9 million metric tons to more or less equal total demand of 1.9 million metric tons, leading to flat ending stocks of 1.91 million metric tons in July. 

“We anticipate a gradual rise in inventory levels moving forward as production enters the peak season in 2HCY20 (the second half of calendar year 2020), which should exert pressure on CPO prices. In addition, due to the recent CPO price rally, the current soybean oil-palm oil (SBO-CPO) spread has narrowed to about US$50/MT (versus the two-year average of about US$109/MT), potentially challenging CPO’s competitive edge against rival oils,” it added. 

Kenanga maintained its "neutral" call for the plantation sector with a CY20 CPO price forecast of RM2,300/metric ton. 

“For investors seeking exposure to the sector, we recommend taking position in bashed-down names like Hap Seng Plantations Holdings Bhd ('outperform'; TP: RM1.85) and TSH Resources Bhd (outperform; TP: 95 sen), which are both trading at -1.0SD (standard deviation) valuation level (versus peers’ at -0.5 to mean valuation),” it said. 

Hong Leong Investment Bank (HLIB) Research maintained its average CPO price projections of RM2,350-RM2,400 per metric ton for 2020-2021 and said current CPO prices may not be sustained into the next few months due to heightened concerns over a resurgence of Covid-19, demand recovery from China which may not be as strong as the pre-Covid-19 level on the back of gradual recovery in China’s hog production, a narrower price gap between CPO and soy oil, and feasibility of discretionary biodiesel blending that remains inexistent.

“For exposure, our top pick is IJM Plantations Bhd ('buy'; TP: RM1.78),” it said. 

Meanwhile, TA Securities Research believes that exports will continue to recover in the next two months due to a decline in palm oil inventories in China and India, coupled with CPO's attractive discount against other edible oils. 

“No change to our average CPO price forecast of RM2,400/tonne for 2020. Going forward, the focus should be centred on the strength of China and India's inventory replenishment and potential Indonesia's production cuts,” said the research house. 

TA Securities downgraded Wilmar from "buy" to "hold", with a target price (TP) of RM4.53, due to limited upside potential. 

“We maintain 'buy' on Sime Darby Plantation Bhd (TP: RM5.68), Kuala Lumpur Kepong Bhd (KLK) (TP: RM25.24) and TSH (TP: RM1.49). Meanwhile, IOI Corp Bhd (TP: RM3.98) and IJM Plantations (TP: RM1.68) are rated as 'sells' due to pricey valuations. Lastly, FGV Holdings Bhd (TP: RM1.16) and United Malacca Bhd's (TP: RM4.83) recommendations still remained as 'hold',” it said.