Upgrade to overweight: The Malaysian Palm Oil Board’s February data showed an increase in crude palm oil (CPO) production to 1.29 million tonnes (+10% month-on-month [m-o-m]; -16.6% year-on-year [y-o-y]) after four consecutive months of decline. This increase was in line with market expectations.
However, stockpiles declined to 1.68 million tonnes from 1.76 million a month ago, mainly attributable to lower imports (-21.5% m-o-m; -29.2% y-o-y) and higher domestic consumption (+16.3% m-o-m; +33.3% y-o-y). Meanwhile, exports remained low at 1.08 million tonnes, which fell within expectations.
The increase in CPO production was the first m-o-m increase in February since 2011 as production is seasonally weak during this particular month. We believe the increase could be due to longer working days as a result of early Chinese New Year (CNY) holidays in January (CNY usually falls in February). However, y-o-y, it was still dow by 16.6%.
Meanwhile, the fresh fruit bunch yield increased by 3.7% m-o-m to 1.11 tonnes per hectare. A higher production yield in Peninsular Malaysia (+18.4% m-o-m) helped to offset a lower yield in Sabah (-1.7% m-o-m) and Sarawak (-9.3% m-o-m).
We believe March production data, which could come in higher on an m-o-m basis, is important to indicate whether the seasonal uptrend may come in earlier than expected.
The twin impact of a collapse in oil prices and the spread of Covid-19 has dragged the CPO April to June futures contract to RM2,342-RM2,355 per tonne, representing a drop of 12.7% to 14.5% m-o-m. However, we believe restocking activity ahead of Ramadan (from end-April) and improved diplomatic relations between India and Malaysia could help to limit any decline in palm oil prices. Note that buyers usually start increasing purchases of palm oil one or two months before Ramadan to meet resurgent holiday demand.
For China, the palm oil stock still remains at a historically high of around 950,000 tonnes. However, we believe once the Covid-19 epidemic wears off, consumption of edible oil will resume and this could push up palm oil demand and support CPO prices. We make no change to our average CPO price forecast of RM2,400 per tonne for 2020.
Most of the plantation stocks are now at attractive valuations after recent massive selldown. This triggers an upgrade for most of the plantation stocks under our coverage except for Sime Darby Plantation Bhd (TP: RM5.53), IOI Corp Bhd (TP: RM3.85) and United Malacca Bhd (TP: RM4.99). We upgrade Kuala Lumpur Kepong Bhd (TP: RM22.54), FGV Holdings Bhd (TP: RM1.19), IJM Plantations Bhd (TP: RM1.73) and TSH Resources Bhd (RM1.19) to “buy” from “sell” as the total upside is more than our required rate of return. — TA Securities, March 11