• Maintain NEUTRAL, with a tactically positive trading strategy; Top Picks – Kuala Lumpur Kepong (KLK), IOI Corp (IOI), Ta Ann (TAH) and Sarawak Oil Palms (SOP). We believe there is more upside for the sector now, with the looming El Nino and potential escalating geopolitical risks. However, notwithstanding these, fundamental outlook remains relatively unexciting. Keep 2023 price assumption of MYR3,900/tonne, but raise 2024 to MYR3,900/tonne (from MYR3,500) and roll forward valuations to 2024F.

• We see more upside risk for the sector now, with the looming El Nino and potentially escalating geopolitical risks relating to the Russia-Ukraine war and grains corridor. However, notwithstanding a strong El Nino and an inability to export any crops from the Black Sea, the fundamental outlook remains relatively unexciting. Supply is expected to come in strongly in 2024, while demand remains somewhat lacklustre. Stock/usage ratios are still comfortably above historical averages in 2024F.

• 2023 price assumptions unchanged, 2024 assumptions raised. While there is a high chance El Nino will be confirmed soon, we expect the impact on palm oil (PO) output to only be seen in 2024. As such, we make no changes to our 2023 CPO price assumption of MYR3,900/tonne. For 2024, if the El Nino is a moderate one, there would be an impact on supply – although not very significant – while prices could continue to be held back by lacklustre demand. We believe prices could be higher in 2H24 vs 1H24, as the impact of El Nino would only be seen from May/June onwards. We are therefore raising our 2024 and 2025 price assumptions to MYR3,900/tonne and MYR3,800/tonne respectively. If the El Nino turns out to be a strong one, we will review our price assumptions.

• We maintain our NEUTRAL sector weighting, with a tactically positive trading strategy. We believe higher CPO prices in 2024 would mean purer players would be looked upon more positively than integrated players. Still, integrated players would provide a more stable earnings base and consistent dividend returns. Also, not all pure players would benefit equally, given the Indonesian tax structure and deteriorated exchange rate. Pure Indonesian planters would not benefit as much as pure Malaysian planters.

• Valuation targets rolled forward. Given our tactical view on the sector, we retain our P/E targets for the large-cap Malaysian planters but roll forward our valuation targets to 2024. We assign an unchanged 18-20x P/E to the plantation divisions of the big-cap Malaysian planters in our SOP valuations, while we raise our target P/E’s for the Malaysian mid-cap and regional players to 8-12x 2024F (from 7-10x 2023F) – in line with current historical valuation averages.

• Top Picks revamped. We have upgraded four stock recommendations, TAH and SOP to BUY (from Neutral) and First Resources (FR) and FGV Holdings to NEUTRAL (from Sell). We now have six BUYs, six NEUTRALs and one SELL. Prefer Malaysian players vs regional players as Indonesia’s tax structure and currency appreciation makes earnings less competitive vs Malaysia. Top Picks: KLK, IOI, SOP and TAH. For a regional flavour, prefer integrated exporters like Wilmar International and Golden Agri (GGR).

Source: RHB Research - 24 Jul 2023