• Top Picks: Kuala Lumpur Kepong (KLK), IOI Corp (IOI) and Wilmar International (Wilmar). We expect to see disappointing earnings in 1Q23F – six players could book below-expectations results, and five come in line. Malaysia’s palm oil (PO) inventory dropped 10.5% MoM in April as production declined 7.1% MoM and exports fell 27.8% MoM. We may not see a marked improvement in Malaysian PO stocks until mid-year given the potential demand shift to Indonesia from May, albeit, offset somewhat by restocking activities. Keep NEUTRAL.

• 1Q23F earnings to drop QoQ and YoY for Malaysian and Indonesian planters. In Malaysia, FFB output for the companies under our coverage fell by an average of 19% QoQ in 1Q23, while spot CPO prices rose 2% QoQ. In Indonesia, we estimate 1Q23 FFB output also fell by c.10% QoQ, (based on seasonal trends), while CPO prices net of taxes fell 8.2% QoQ. On a YoY basis, we should see the same declining earnings trend. In Malaysia, although average FFB output rose by a slight 1.3% YoY in 1Q23, spot CPO prices dropped 35% YoY. In Indonesia, we estimate FFB output rose c.5.8% YoY in 1Q23, while net CPO prices fell 22% YoY. As such, we expect to see both Malaysian and Indonesian planters post weaker QoQ and YoY earnings in 1Q23.

• 1Q23 likely to bring mostly earnings below expectations for planters, based on our estimates of production output alone (Figure 1) given the seasonally weaker output. Four may underperform forecasts based on FFB output (Sime Darby Plantation, FGV, Sarawak Oil Palms, Ta Ann), while two JCI-listed planters have already released below expectation results. We expect the remaining planters to come in within expectations.

• For those with downstream operations in Indonesia, we expect margins to improve QoQ in 1Q23 as the tax levy holiday ended in mid-Nov 2022. As such, the tax differential between upstream and downstream products should widen, resulting in better downstream margins. However, Malaysian downstream counterparts should see narrower QoQ margins with the reinstatement of the levy, as competition resumes from Indonesia.

• Malaysia’s April output saw a 7.1% decline MoM resulting in stocks falling to 1.5m tonnes (-10.5% MoM) while exports plunged 27.8% MoM. We may not see a marked improvement in Malaysian PO stocks until mid- year given the potential demand shift to Indonesian palm oil from May (due to export quota release and domestic market obligation (DMO) loosening), although this could be partially offset by restocking activities by India and Pakistan.

• Maintain NEUTRAL. Overall, we continue to expect CPO prices to remain rangebound between MYR3,500-4,500/tonne for the rest of 2023, and average MYR3,900/tonne. We maintain our NEUTRAL sector call with a trading strategy. Top Picks are the integrated players: KLK, IOI, Wilmar and Golden Agri – as they perform better in a lower CPO price environment.

Source: RHB Research - 11 May 2023