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We Believe CPO Price Will Remain at Considerably High in the Longer Term (albeit Not as High as Current Level), Supported by (i) Indonesian Government’s Launch of B30 Biodiesel in End Dec-19, (ii) Imminent Palm Output Deficit (arising From Drought and Cutback in Fertilisers in 2018-2019 Amidst Low CPO Prices), and (iii) African Swine Flu (ASF), Which Has Yet to Show Sign of Abating. Given Our More Bullish Stance on CPO Price (in Particularly, 1Q20), We Raise Our Average CPO Price Assumption in 2020-2021 by RM150/tonne to RM2,550/tonne, and Raise Our Core Net Profit Forecasts and TPs for Plantation Stocks Under Our Coverage. Hence, We Maintain Our Overweight Stance on the Sector. For Exposure, Our Top Picks Are FGV (BUY: TP: RM1.72), Genting Plantations (BUY: TP: RM12.82), and Hap Seng Plantations (BUY: TP: 2.29).

CPO price to remain considerably high (albeit not as high as current level). Although it is unlikely for CPO price to sustain at current level over the longer term (due to demand rationing in some major palm oil importing countries, arising from current high CPO price and rising soybean crush margins in China), we believe CPO price will still remain considerably high (at above RM2,500/tonne) over the longer term, supported by (i) Indonesian government’s launch of B30 biodiesel in end Dec- 19, (ii) imminent palm output deficit (arising from drought and cutback in fertilisers in 2018-2019 amidst low CPO prices), and (iii) ) African Swine Flu (ASF), which has yet to show signs of abating.

Higher biodiesel mandate to eliminate palm oil stockpile . Higher biodiesel mandate from Malaysia and Indonesia combined will boost palm oil consumption by circa 3m tonnes p.a. (equivalent to 4% of the world’s total palm oil production in 2018). We understand that Indonesian government has launched B30 (from B20 previously) since Dec-19. We understand that MEMR has already allocated 9.6m kilolitres of unblended biodiesel for its B30 biodiesel mandate in 2020 (up from 6.6m kilolitres in 2019), and it is likely for Indonesia to meet such an ambitious deadline as hefty fines will be imposed on diesel producers for non-compliance.

Imminent palm output deficit in Malaysia and Indonesia. Palm production in both Malaysia and Indonesia (which account for circa 85% of the world’s palm production) had been falling short of expectations since Oct-19, due to fertiliser applications in 2H18 and 1H19, biological yield cycle downtrend, and low rainfall. Lower palm supply, coupled with higher biodiesel consumption will likely result in further drawdown in palm inventory in Malaysia and Indonesia over the next few months.

Raise average CPO price assumption to RM2,550/tonne for 2020-2021. We raise our average CPO price assumption in 2020-2021 by RM150/tonne to RM2,550/tonne, given our more bullish stance on CPO price (in particularly 1Q20).

Changes to core net profit forecasts. Core net profit forecasts raised on higher average CPO price assumption. Corresponding to our CPO price assumption uplift, we raise our FY20-21 core net profit forecasts and TPs for plantation companies under our coverage. Post revision to our TPs, rating for all other plantation stocks remain unchanged, except for KLK (which rating was downgraded to HOLD).

Maintain Overweight stance. We maintain our Overweight stance on the sector, given our optimism on the sector’s prospects. For exposure, our top picks are FGV (BUY: TP: RM1.72), Genting Plantations (BUY: TP: RM12.82), and Hap Seng Plantations (BUY: TP: 2.29).

Source: Hong Leong Investment Bank Research - 10 Jan 2020


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