Higher CPO prices drive plantation’s strong 1Q performance

by ANIS HAZIM / pic by BLOOMBERG

PLANTATION companies on Bursa Malaysia posted stronger financial performance in the first quarter of 2021 (1Q21) driven by favourable prices of crude palm oil (CPO). The industry is also set to enjoy strong prices due to labour shortages and strong demand albeit at lower prices, according to MIDF Amanah Investment Bank Bhd.

In a research report last Friday, MIDF stated that the average selling price (ASP) of CPO in 1Q21 was RM3,926 per metric tonne (MT) compared to RM2,670 per MT in 1Q20 .

“This was predominantly attributable to the stronger price of soybean oil (due to weather woes in South America), low inventory level despite an increase in production and higher export demand during the quarter-under-review,” MIDF said.

CPO price for the benchmark futures contract closed RM3,516 a tonne last Friday, up RM95 on the day, well below the year-high of RM4,524 a tonne level in May.

The higher export demand during 1Q21 was primarily due to restocking activities from China and India (ahead of the month of Ramadhan).

MIDF added that fresh fruit bunch production remains flattish in view of labour shortage and adverse weather conditions.

“CPO export demand started to show significant improvement in March 2021, with the total export demand reaching above one million MT after two months recording a total amount of export below one million MT,” it said.

However, the export in May 2021 was slightly down by 6% month-on-month (MoM) to 1.27 million MT, from 1.35 million MT due to lower volume of export demand from Pakistan and the US, as well as slower growth from India.

“Going ahead, we are anticipating slower growth of export demand from India on the back of Indian lockdowns,” the research firm said.

MIDF noted that China remains a bright spot in export demand as it showed an upbeat performance for the past two months with exports there jumped by 52.8% MoM in April 2021 and edged up by 30% in May 2021.

“Based on our observation, we note that China and India have emerged as the top Malaysian palm oil importer with a share of 26.8% (8.9% from China and 17.9% from India) with total export demand growth of +67.1% year-on-year (YoY) in 1Q21,” it said.

MIDF believes the replenishment of reserves by major buyers implies healthy levels of palm oil exports into the year under review on the back of recovery in economic activities globally given the acceleration of vaccination programmes.

Early this year, palm oil production level in Malaysia was subdued due to adverse localised weather concerns, labour shortages and lower fertiliser applications.

However, the output level has shown a positive improvement in March as the production level increased by 1.9% to 1.4 million MT, MIDF said.

The research firm stated that more conducive weather conditions will result in an uptrend in crop output in the coming months.

“We opine that crop output will see seasonal recovery moving into 3Q and as a result, this is likely to lead to an inventory build-up. Our local palm oil inventory has recorded a positive recovery since March 2021 (inventory level edged up by 10.6% MoM to 1.4 million MT),” it said

In the intermediate term, MIDF expects inventory level to stay below the two million MT level in view of labour shortage, and stockpiles to start growing slowly as the industry enters the higher crop season.

“Given unresolved labour shortages and implementation of MCO (Movement Control Order) rules on agribusiness, we believe the palm oil supply tightness situation will likely remain at least until 3Q21,” MIDF said.

Despite the delay in the rollout of the B20 biodiesel programme, the research firm believes demand for palm oil-based biodiesel will remain firm, given a few countries have increased the usage of biodiesel namely Indonesia and Thailand.

The brokerage also noted that the US Department of Agriculture has increased its forecast for Brazilian soybean production which will negatively impact CPO price as high soybean stocks will eventually lead to higher supply of soybean oil.

MIDF has maintained a ‘Positive’ call on the plantation sector with revised CPO target price (TP) for calendar year 2021 (CY21) of RM3,200 MT from RM3,000 MT.

“We believe the replenishment activities to import more palm oil will continue to be healthy into CY21 on the back of more reopening of economic activities,” it said.

On a side note, MIDF expects CPO price would not ease drastically or go below RM2,500 level due to unresolved labour shortages from border closure, implementation of MCO rules on agribusiness, upbeat export demand, slow production growth, and firm demand for palm oil-based biodiesel.

MIDF’s top pick in the plantation sector is Kuala Lumpur Kepong Bhd (‘Buy’, TP: RM28.90), followed by TSH Resources Bhd (‘Buy’, TP: RM1.49), and Ta Ann Holdings Bhd (‘Buy’; TP: RM4.11).

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