We upgrade the sector to Overweight from Neutral. We expect CPO prices to be stronger in 2025F, averaging at RM4,250/tonne (+6.3% YoY), underpinned by supply tightness in palm, rapeseed and sunflower oils. CPO exports are envisaged to be affected by Indonesia’s growing consumption led by biodiesel and restrictions on overseas shipments. Unlike in previous years, we do not expect CPO prices to fall sharply in 2H, as the EU is expected to step up purchases before the EUDR (EU Deforestation Regulation) is implemented at end-2025F. Our top pick is KL Kepong (FV: RM26.55) for the young age profile of its oil palm trees and strong recovery in downstream earnings. We also initiate coverage on JPG with a BUY and FV of RM1.74/share, liking it for its pure exposure to CPO prices, premium selling prices and strategic location of its oil palm estates.

• Upgrade to Overweight. We have assumed an average CPO price of RM4,250/tonne for pure Malaysian planters in 2025F (9M2024 average MPOB spot price: RM4,003/tonne). We think that average CPO price would exceed RM4,500/tonne in 1H2025 before softening to RM4,000/tonne in 2H2025. We raise earnings for planters under our coverage by 3-4% (see Exhibit 5). Our top pick is KL Kepong (BUY, FV: RM26.55/share), being a beneficiary of EU restocking activities. We also have BUYs on IOI Corporation (FV: RM5.00/share), Genting Plantations (FV: RM7.55/share) and TSH Resources (FV: RM1.35/share). For smaller caps, we initiate coverage on Johor Plantation (BUY, FV: RM1.74/share) for its pure exposure to CPO prices and its attractive yield of 4%.

• Supply tightness of vegetable oils in 2025F. We reckon that a shortage of palm oil, sunflower and rapeseed oils would drive CPO prices. According to Oil World, the three vegetable oils account for 52.3% of global consumption of oils and fats. We expect palm oil production in Malaysia to ease after a bumper harvest in 2024F and the ongoing freeze in foreign worker recruitment. At the same time, we believe Indonesia's palm exports will continue to fall as the country prioritises its local market, which has been expanding on the back of biodiesel blending policies and domestic market obligations.

• Potential supply tightness in EU due to EUDR. We believe that smallholders account for 30% to 40% of CPO production in Indonesia and 26% in Malaysia. Under normalised conditions, EU imports about five to six million tonnes of palm products per year. If 10% of these do not comply with EUDR, this would imply a shortage of 500,000 to 600,000 tonnes.Despite the EU's plan to phase out palm biodiesel by 2030F, the bloc's palm demand has been rising. We attribute this to a drop in the supply of sunflower oil in 2023 and stocking activities ahead of the EUDR implementation, which was supposed to be in December 2024. The EUDR has since been postponed to 30 December 2025.

• What is China's potential palm oil purchases? Assuming a 20% growth, China's palm imports could reach 3.6mil tonnes in 2025F. At the peak in 2019, China's palm imports amounted to 7.6mil tonnes. China's palm imports have been falling as domestic consumption was affected by weak economic activities. Supported by government stimulus measures, we believe that China's demand for soybean and palm products would improve in 2025F. In September 2024, China announced that it would reduce interest rates, cut reserve requirements and issue special sovereign bonds to boost the economy.

Source: AmInvest Research - 5 Nov 2024