• The Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for June. Malaysia’s palm stockpiles rose by 8.8% to 1.7mil tonnes as of end-June from 1.5mil tonnes as of end May as production rebounded and exports dropped. The MoM increase in CPO production in June was not surprising as harvesting activities hardly took place during Hari Raya in May. Malaysia’s palm exports shrank in June as Indonesia resumed export sales after the ban on CPO shipments was lifted on 23 May. The palm inventory of 1.7mil tonnes in June was within Bloomberg consensus Estimates.
• We believe that Malaysia’s inventory would continue rising in July due to higher production and weaker exports. On the other hand, Indonesia’s palm exports are expected to accelerate in July as more permits have been issued. We think that large plantation companies in Indonesia would be selling aggressively to reduce stockpiles in storage tanks. Recently, it was reported that some palm oil mills in Indonesia and Malaysia have stopped buying FFB from smallholders as storage tanks are full and CPO prices have dropped.
• Malaysia’s palm imports increased for the first time in 3 months. Palm imports climbed by 18.9% to 70,137 tonnes in June from 58,985 tonnes in May as downstream companies in Malaysia bought cheaper feedstock from Indonesia. However, palm imports dived to 575,245 tonnes in 1H2022 from 828,405 tonnes in 1H2021 due to Indonesia’s restrictive export policies. Domestic disappearance of palm oil increased by 8.9% MoM to 288,158 tonnes in June as consumption and transportation activities remained resilient even after the Hari Raya festive period in May. Comparing 1H2022 against 1H2021 however, domestic disappearance of palm oil slid by 9.2% to 1.6mil tonnes.

• Malaysia’s CPO production growth was -1.1% YoY in 1H2022. Oil World estimates that the country’s CPO output would improve by 5% to 6% to 19.2mil tonnes in 2022E. The arrival of foreign workers in July and August is expected to boost Malaysia’s CPO production in 2H2022. 2H usually accounts for 55% to 60% of the full-year CPO production while 1H makes up the balance 40% to 45%. On a monthly basis, the country’s CPO output rose by 5.8% to 1.6mil tonnes in June. Peninsular Malaysia recorded an 8.3% MoM surge in CPO output in June while Sabah registered a 4% increase. In Sarawak, CPO production expanded by 1.2% MoM to 329,664 tonnes in June.

• CPO exports fell by 13.3% MoM to 1.2mil tonnes in June mainly due to a 45.6% drop in shipments to India and 11.3% decline in demand from the EU. We reckon that India would continue buying palm products from Indonesia. Also, India has ample reserves of edible oils. Inventory of edible oils at the ports and pipelines stood at 2.2mil tonnes as of 1 June 2022 vs. 1.7mil tonnes as of 1 December 2021. On a positive note, China’s palm imports rose by 13.3% MoM in June. Going forward however, we believe that China’s demand would be soft due to the Covid-19 lockdowns. China’s imports of Malaysian palm products slid by 23.7% YoY in 1H2022.

• We affirm UNDERWEIGHT on the plantation sector. We are now assuming an FY23F PE of 18x each in arriving at the fair values of the large planters in our coverage. The PE of 18x is mid-way in the PE band of 10x–25x in the CPO price cycle. The exception is Sime Darby Plantation, which we have assumed a lower PE of 15x due to ESG issues and loss of Cargill as a customer. We have assumed an FY23F PE of 15x for the smaller companies such as Hap Seng Plantations and TSH Resources. We reckon that there is more downside to CPO prices as production is envisaged to increase in the coming months in Malaysia and Indonesia. Currently, we are assuming an average 2022E CPO price of RM4,500/tonne for the large planters in our coverage.

Source: AmInvest Research - 13 Jul 2022