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PublicInvest Research

Author: PublicInvest   |   Latest post: Wed, 21 Oct 2020, 10:11 AM

 

Plantation - Mixed Views on CPO Price Outlook

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We attended the Palm Oil Internet Seminar hosted by Bursa Malaysia and Malaysian Palm Oil Council (MPOC) yesterday and came away with mixed views from various industry experts. The event drew a total of more than 5,500 attendees. Majority of the experts view the impact of Covid-19 having a big influence on global palm oil consumption this year. Industry price forecasts range from RM1,800/mt–2,500/mt meanwhile, versus our CPO price forecast of RM2,300/mt. Last closing CPO price settled at RM2,361/mt, and averaging RM2,481/mt YTD. We retain our Neutral call on the sector. Our only preferred pick is Sarawak Plantation.

  • Consensus forecasts average at around RM2,300/mt. Generally, most industry experts have a mixed view on the price outlook this year due to the impact of Covid-19. Positive views are led by Malaysia’s MPOB, who thinks CPO prices could potentially hit RM2,500/mt this year, driven by the resumption of B20 programme and export tax exemption of CPO, CPKO and RBDPKO. On the other hand, the bearish view is led by notable industry expert, Dr. James Fry, who predicts that Malaysian palm oil stocks could surge as much as 50% to 3m mt by year-end.
  • Major wildcards. Despite the mixed outlook by most speakers, we notice that their views on the key driver for palm oil price movement largely hinges on i) oil price movements as it plays a vital role in biodiesel demand and ii) the prolonged impact of Covid-19 as slow economic recovery could be a drag on palm oil demand.
  • Ban on foreign labour recruitment until year-end. Malaysia’s Human Resources Ministry also announced yesterday that there will be a freeze on foreign labour recruitment in all sectors until year-end. This is to give way to the usage of local labour due to the current high unemployment rate in the country. This is definitely a big hit to the labour-intensive plantation sector as foreign labour makes up nearly 84.1% of the total work force. Majority of them are harvesters & collectors (38%) and field workers (33%), considered as “tough” jobs for the locals.
  • Looking at average CPO price of RM2,300/mt for 2020. We see CPO prices staying in the range of RM2,200-2,300/mt for the 2H given the higher inventory levels due to the seasonally higher production level.
  • Neutral. Given the lack of re-rating catalysts, we have a Neutral call on the sector. We only favour Sarawak Plantation given its i) double-digit FFB production growth, ii) attractive forward PER of 13x and iii) room for FFB yield improvement on the back of increasing harvestable area.

Source: PublicInvest Research - 23 Jun 2020

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