KUALA LUMPUR: CGS-CIMB Equities Research expects crude palm oil (CPO) prices to trade in the range of RM2,900 to RM3,200 per tonne in Jan 2020F and average RM2,300 per tonne for 2020F.

In its research note, it said the sharper-than-expected decline in CPO output in December coupled with expectation that CPO supply is likely to stay low in 1Q due to seasonal factor are likely to be supportive of CPO price.

“Our top picks in Malaysia are Genting Plantations, Hap Seng Plantations and KL Kepong and regional picks are Wilmar and First Resources, ” it said.

Malaysia’s palm oil stocks fell 11% month-on-month and 38% year-on-year to a 27-month low of 2.01m tonnes at end-December 2019.

This was 2% below CGS-CIMB Research’s projection of 2.05m tonnes and 3% below both Reuters’ and Bloomberg’s forecasts of 2.06 tonnes and 2.07m tonnes.

The lower-than-expected stockpile versus the research house’s forecast was mainly due to lower than expected production. The lower-than-expected stockpile is near-term supportive of CPO price.

Production shortfall was the main surprise CPO production fell 13%on-month and 26% on-year to 1.33m tonnes in December 2019, the lowest monthly palm oil output in December since 2010.

“This is possibly due to lower fertilisers applied by farmers a year ago, biological tree-stress and dry weather experienced in part of the region.

“2019 CPO production of 19.86m tonnes (+2% yoy) was in line with our full-year forecast of 19.9m tonnes. For 2020, we project CPO production for Malaysia to decline 1.2% yoy to 19.63m tonnes due to lower FFB yields, ” it said.

Palm oil exports declined 1% on-month but rose 1% yoy to 1.4m tonnes in Dec 2019. The weaker on-month exports were mostly due to weaker demand from China (-25% on-month), India (-3% on-month) and the EU (-19% on-month).

The weaker exports could be due to the sharp rise in CPO price relative to other edible oils, which may have prompted some consumers to switch to other edible oils or reduce discretionary biodiesel blending.

“In Jan 2020, we expect exports to remain strong in the first few weeks ahead of Lunar New Year celebration on Jan 25 but may weaken in the later part of the month.

“We project palm oil stocks to fall 8% on-month to 1.84m tonnes at end-Jan 2020F as consumption and exports are projected to trump production and imports. We expect January palm oil output and exports to fall 5% on-month and 10% on-month, respectively, ” it said.

CGS-CIMB Research has an Add for Genting Plantations, TP RM11.90, RM10.60 close.

It likes Genting Plantations for its rich land bank and young estates. The group has one of the youngest estate age profiles among its big-cap peers in Malaysia.

It also has an Add for Hap Seng Plantations, TP RM1.88, RM2 close. Its Add rating on is based on the view that the current implied low EV/ha of RM30k/ha for its RSPO-certified contiguous estates in Sabah could attract suitors, leading to a share price re-rating in the medium term.

Kuala Lumpur Kepong Add, TP RM24.94, RM24.66 close. It likes KLK as the recent share price correction and ongoing CPO price rally, make for a more attractive risk-reward proposition.

KLK also has younger estates than its big cap planter peers listed on the KLCI index.

Source : The Star