• Top Picks: IOI Corp (IOI), Ta Ann (TAH), Sarawak Oil Palms (SOP) and Golden Agri (GGR). Investors should adopt a tactically positive trading strategy, premised on the confirmation of El Nino and potentially escalating geopolitical risks related to the Russia-Ukraine war and the grain corridor. While we maintain our price assumptions of MYR3,900/tonne for 2023- 2024F, we expect prices to move firmly past MYR4,000/tonne in 2024 once the El Nino impact hits productivity. We remain NEUTRAL on the sector.

• Expect CPO prices to move past MYR4,000/tonne in 2024. For the rest of 2023, we do not expect CPO prices to move past the MYR4,000/tonne mark. However, in 2024, we expect CPO prices to range higher from current levels to MYR4,000-4,500/tonne, once the impact of El Nino starts to affect productivity in 2H24F.

• Our base case assumption is a moderate El Nino and a resolution/solution for the grains corridor issue before end-October, which is when the harvesting period for Russia and Ukraine’s sunflower crops ends. We assume that Russia and Ukraine will be able to find ways to export their grains and oilseed products even without the grain corridor. Should these two assumptions be proven wrong, we will need to relook at our price assumptions.

• Although we see rising supply risks, demand is still relatively lacklustre. The discount between CPO and soybean oil (SBO) has narrowed slightly of late to USD543/tonne (from USD650/tonne last month), thereby making CPO less attractive again vs competitive oils. Meanwhile, palm oil stock levels at major importing countries are now above historical levels, providing less incentive for restocking activities – given the fragile global demand, which in turn stems from a weak economic sentiment. In addition, the competition between and Malaysian and Indonesian palm oil remains intense – resulting in the former losing market share.

• Biodiesel mandates provide a backbone for demand. Base demand from Indonesia’s biodiesel mandate remains strong, while the current positive palm oil-gas oil (POGO) spread makes biodiesel financially feasible again. This may drive the return of discretionary demand of 2.5-3m tonnes.

• No change to our favoured picks. We continue to believe higher CPO prices in 2024F will mean that the purer planters would be looked upon more positively than the integrated players, given the latter’s higher sensitivity to price movements. However, integrated players would provide a more stable earnings base and consistent dividend returns. In addition, we highlight that not all pure players would tend to benefit equally in terms of earnings, given the Indonesian tax structure – which would make purer Malaysian planters more attractive than a pure Indonesian planter. As such, for Indonesian exposure, we would prefer the integrated players, as they benefit from Indonesia’s tax structure in the form of higher margins. With our current tactically positive outlook, our Top Picks are unchanged – namely purer Malaysian-based planters like TAH and SOP, and integrated players like IOI and GGR.

Source: RHB Securities Research - 5 Oct 2023