Higher biodiesel appetite pushes demand

The implementation of biodiesel mandates in Indonesia and Malaysia, will represent an extra 3.6m tonnes of CPO consumption


THE plantation sector is showing some signs of improvement as a result of the robust demand for crude palm oil (CPO) and the expected lower production of the commodity.

Kenanga Investment Bank Bhd’s research report stated that it is revising the CPO price forecast for 2019-2020 from between RM2,000 and RM2,200 per tonne to RM2,100 and RM2,400 per tonne.

The research report has also upgraded the sector’s stance from ‘Underweight’ to ‘Neutral’.

“There are increasing signs pointing towards the possibility of CPO demand growth outpacing supply growth,” it said in a research report.

The research house said the dry weather in Indonesia and the implementation of higher biodiesel mandate by Malaysia and Indonesia are estimated to boost CPO demand and outpace its production.

The expected implementation of biodiesel mandates in Indonesia, B30, and B20 for Malaysia, will represent an additional 3.6 million tonnes of CPO consumption in total.

Kenanga Investment stated that palm oil export will also be stimulated by the demand uptake from China due to the outbreak of African swine fever virus, which had hurt its domestic soybean production, and the restricted soybean imports between the US and China.

“The strong demand for palm oil as a substitute to soybean oil in China is expected to continue as soybean crushing activities remain low.

“To put things in perspective, the African swine fever outbreak has reduced China’s pig herd by 40% and consequently, the demand for soy meal.

“A recovery in our opinion is likely to take between six and 12 months, given that the disease is still spreading in some parts of the country,” the report stated.

It added that the low production season of the commodity is expected to be dragged into 2020 due to the lack of fertiliser usage and the slowdown replanting activities to manage costs during depressed CPO price period.

“According to the World Meteorological Organisation, sea surface temperatures in the tropical Pacific Ocean were at weak El Niño levels from April to June 2019.

“Similarly, Malaysia and Indonesia experienced dry weather in June which continued into early October, with more severe conditions for the latter,” the report stated.

Additionally, the Malaysian Palm Oil Board recently revised its 2019 CPO production lower to 20 million tonnes from 20.3 million tonnes, now implying only 2.5% growth on an annual basis.

The research house had recommended Kuala Lumpur Kepong Bhd (KLK) and Hap Seng Plantations Holdings Bhd as the valued stocks.

Kenanga Investment has raised KLK’s target price to RM24.50 from RM22.28 previously, while Hap Seng Plantations’ target price was raised from RM1.53 to RM1.70.

“At the current price, KLK is trading at Fwd. The price by volume was 2.2 times, which we believe is unjustified given its above-average fresh fruit bunches growth of 4.3%, the above-sector average of return of equity in the financial year 2020 of 8% and the decent dividend yield of 2.2%.

“We like Hap Seng Plantations as a pure upstream planter, allowing it to capitalise on the recovery in CPO price to a greater extent. Its zero exposure to Indonesia also allows it to mitigate the impact of the dry weather,” it said.