Palm oil demand could pick up ahead of Ramadhan — Affin Hwang Capital Research

Palm oil demand could pick up ahead of Ramadhan — Affin Hwang Capital Research
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KUALA LUMPUR (March 11): Demand for palm oil products could improve in March and April ahead of Ramadhan and a rapprochement between the new administration in Putrajaya and India.

In a plantation sector note this morning, Affin Hwang Capital Research said Ramadhan festivities — which starts in late April this year — is a factor that is expected to improve demand for palm oil products.

Another factor is the reconciliation between Malaysia and India, considering the latter’s decision to lift safeguard duties, which were applied in September 2019 until early March 2020, on Malaysian refined palm oil. 

In terms of production, the research house is forecasting Malaysian crude palm oil (CPO) production in 2020 to be 1% to 2% lower due to the lagged effect of the dry weather in 2019, lower fertilisation application and minimal new plantings of oil palm trees.

2019’s overall CPO production in Malaysia stood at 19.9 million metric tonnes (MT), while CPO production for the first two months of 2020 was down 25% year-on-year to 2.46 million MT.

Malaysia’s palm oil inventory in February 2020 declined 4.2% month-on-month to 1.68 million MT, the lowest point since June 2017 following higher total consumption of palm-oil products vis-à-vis production.

Affin Hwang Capital is expecting the downtrend in palm oil inventory levels to continue for the next one to two months as total consumption is expected to outweigh production,

While it is optimistic that CPO prices will recover due to the expectation of supply tightness for the eight vegetable oils in the first half of the year, the research house pointed out that the continued presence of the Covid-19 outbreak, oil price crisis or continued weakness in market sentiment would likely put its 2020 CPO average selling price (ASP) forecast of RM2,500 a MT at risk.

“Across our coverage, we have 'buy' ratings on Ta Ann Holdings Bhd, IJM Plantations Bhd, Hap Seng Plantations Holdings Bhd, Kuala Lumpur Kepong Bhd (KL Kepong), FGV Holdings Bhd and Jaya Tiasa Holdings Bhd, and 'hold' ratings on IOI Corp Bhd, Sime Darby Plantation Bhd and Genting Plantations Bhd. We are 'overweight' on the plantation sector as we expect 2020 to be a better year for the companies.

"We like: (1) KL Kepong (large-cap) as we expect future earnings to improve on the back of higher CPO prices coupled with its cheaper valuation as compared to the sector average; and (2) Ta Ann (small-mid cap) on the back of its improving earnings (higher log sales volume, and stronger CPO production and ASP),” noted Affin Hwang Capital.