Palm oil inventories in Malaysia rose more than expected in Oct as exports tumbled and production increased to a 14-month high. CPO futures retreated to the current level of RM4,932/mt after hitting the peak at RM5,017/mt last month. Meanwhile, we had recently raised our 2021 and 2022 CPO price targets to RM4,000/mt and RM3,500/mt respectively. In addition, we had also streamlined our valuations to factor in the rising ESG concerns. Maintain Neutral call on the sector and our top picks are Sarawak Plantation, Ta Ann and TSH Resources.

• A reversal in declining inventory level. After seeing a decline in the previous month, Malaysian stockpiles rose 4.4% MoM to 1.83m mt, The higher-than-expected palm oil stockpile level was mainly attributed to a slide in exports while production climbed to a 14-month high. Meanwhile, stock-to-usage ratio inched up from 7.7% to 9%.

• Palm oil exports fell 12% MoM. Palm oil exports in Oct dipped 12% MoM to 1.41m mt, weighed by weaker demand from EU (-21.9%), India (- 16.8%), Pakistan (-5.7%) and US (-58.1%). Only China showed stronger palm oil imports from Malaysia.

• FFB production may have peaked. In contrast to market’s expectation of seeing a decline, FFB production rose 1.3% MoM to 1.73m mt, the highest since Sept. Production from East Malaysia increased by 2% to 810.3m mt while Peninsular Malaysia saw a marginal increase. We think oil palm trees may have hit its peak production season last month.

• Expecting to see strong quarterly earnings report cards. Due to the acute labour shortage condition in the harvesting fields, all plantation companies with the exception of TSH posted a decline in 3Q 2021 FFB production. Meanwhile, 3QFY21 CPO prices averaged at RM4,439/mt compared to 2QFY21’s RM4,197/mt and 3QFY20’s RM2,774/mt. During the quarter, CPO price hit record level as it finished as high as RM5,415/mt. Led by stronger CPO prices, we expect to see another impressive earnings quarter for the plantation sector. Small-mid cap players are likely to deliver the biggest earnings growth given that their CPO sales are mostly done at spot prices.

• Temporary relief for foreign worker shortage issue. Our palm oil industry currently requires about 75k foreign workers in the harvesting fields. Malaysian government has recently approved 32k foreign plantation workers to be brought in gradually. The impact will be felt somewhere in the 1QFY22.

Source: PublicInvest Research - 11 Nov 2021