Malaysia’s palm oil industry kick-started the year with palm oil inventories falling to a 6-month low as output continued sliding for third straight month. Meanwhile, CPO prices remained strong in Jan 22, rising from RM5,085/mt in Dec to RM5,385/mt. Plantation stock prices have recently started gaining momentum especially Malaysia’s pure upstream players. Maintain Neutral on the sector.

• Palm oil inventories weighed by a steep decline in production. Comparing to market estimates of 1.58m mt, palm oil Inventories in Jan 22 slipped 3.9% MoM to a 6-month low of 1.55m mt, dragged by a sharp decline in production. Meanwhile, stock-to-usage ratio rose from 7.7% to 9.3%.
• A slowdown in exports. Palm oil exports softened by 18.1% MoM to 1.16m mt, the steepest monthly decline in a year. The weak exports were mainly attributed to China (-33.9%), Pakistan (-28.8%) and US (-93.5%) which were partly offset by EU (+24.4%) and India (+57.4%).
• Output on seasonal drop. Comparing to market estimates of a 10% decline, production fell 13.6% MoM to 1.25m mt, the lowest level in 11 months. Output from East Malaysia and Peninsular Malaysia fell 12.4% and 14.8%, respectively. Besides low production season, the sharper than-expected decline in FFB production was also due to labour crunch.

• A steep increase in minimum wage by year-end. Malaysia’s Human Resources Minister, Datuk Seri Saravanan Murugan recently said that the minimum wage is expected to increase from the current of RM1,200/mth to RM1,500/mth by the end of the year. That is a steep growth of 25%. We believe that the labour-intensive palm oil sector is unlikely to experience significant financial impact as more than 75% of the industry workers are already earning above the proposed minimum wage. Labour cost normally makes up about 20%-30% of the total operating costs but we expect an increase of only 5%-7% in the labour cost upon the implementation of the proposed minimum wage.

• Earnings surprise for the upcoming quarterly results? Given the stronger-than-expected CPO price performance in the 4Q 2021, we do not rule out the possibility of earnings surprises for some plantation companies in the upcoming results. We believe the pure upstream Malaysian planters, namely, Ta Ann and Sarawak Plantation would be the main beneficiaries of the CPO price rally.

Source: PublicInvest Research - 11 Feb 2022