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Keep NEUTRAL, Top Picks: Kuala Lumpur Kepong (KLK), IOI Corp (IOI) and Wilmar International.We saw disappointing earnings in 1Q23, and are likely to continue seeing lower QoQ and YoY earnings in 2Q23. Malaysia’s palm oil (PO) inventory rose 12.6% MoM in May as production grew 26.8% MoM while exports slipped 0.8% MoM. Going forward, we expect to see a gradual improvement in PO stocks as output continues to rise, although this could be partially offset by restocking activities.
The 1Q23 reporting season saw disappointing earnings, with four planters booking numbers that were below expectations, while two posted in-line results and one came in above forecasts. The main cause of the disappointing results were higher-than-expected unit costs and lower-than- expected PK prices. We make no changes to our CPO price assumptions for now, which are MYR3,900/tonne, MYR3,500/tonne and MYR3,500/ tonne for 2023, 2024 and 2025.
In Malaysia, output rose 3.2% YoY but contracted by 23.3% QoQ in 1Q23, due to seasonal factors. For the companies we cover – in Indonesia, we saw an average 0.9% YoY output growth, while in Malaysia, we saw an average 1.3% YoY growth. As usual, the Association of Indonesian Palm Oil Producers’ (GAPKI) official 1Q23 CPO output trends differed – with an 8.7% YoY increase. Going forward, both Malaysian and Indonesian planters are expecting a recovery in output in 2H23 – ranging from a mid-single digit to low double digits, on the back of an improved labour workforce in Malaysia and the seasonal peak period.
El Nino no impact yet. Based on our checks, planters are not seeing any tree stress currently, citing good rainfall thus far, despite temperatures being higher during the current heat wave. Expectations are still high for 2H23’s output based on black bunch counts and improved labour force. However, depending on the severity of the El Nino (assuming it comes) there could be an impact on 2024 output.
Malaysia’s May output saw a 26.8% increase MoM resulting in stocks rising to 1.7m tonnes (+12.6% MoM) while exports slipped 0.8% MoM. Going forward, we expect to see a gradual improvement in Malaysian PO stocks as output continues to rise, although this could be partially offset by restocking activities by China and India. We see a persistent preference for Indonesian PO, especially after Indonesia reduced its domestic market obligation (DMO) ratio at end-April. YTD-May, Malaysia’s exports is down 1.3%, but India and China’s palm oil imports jumped 25% and 125% YoY in YTD-April. However, Malaysia’s exports to China in YTD-April is only up 13.46% YoY, while exports to India in YTD-April was down 14.08% YoY.
Maintain NEUTRAL. We expect sector earnings to decline further QoQ in 2Q23, on the back of lower CPO prices and weak productivity, coupled with elevated costs. However, earnings should be lifted in 2H, as productivity improves and costs moderate. We are reviewing our 2024 CPO price assumption but maintain our 2023 forecast for now. Top Picks are the more integrated players: KLK, IOI, Wilmar, and Golden Agri.
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