The palm oil industry witnessed an unprecedented super-cycle with CPO futures topping RM6,000/mt yesterday for the first time. We turn bullish on the sector as we expect a strong earnings trajectory for the plantation companies. We think CPO prices will remain strong in the first half of 2022 given the tight global vegetable oil supplies and also supply constraint for palm oil in the top two producing countries. Hence, we revise up our CPO price assumption from RM3,500/mt to RM4,300/mt and RM3,800/mt for 2022 and 2023, respectively. Our preferred exposures are Sarawak Plantation and Ta Ann as we believe they can fully capture the current CPO price rally. Upgrade from Neutral to Overweight for the sector.

• Tightening supply ahead of Ramadan celebration. Malaysian palm oil industry started off 2022 with low carry-over stocks, standing at 1.61m mt. As 1H is the seasonal low production period coupled with the growing demand ahead of the Hari Ramadan festive period, palm oil inventory is expected to remain tight in the near-term.

• Prefer pure upstream players in Malaysia. Following our upward CPO price revision, we raise our FY22-24 EPS forecast by 25%-65% for the plantation companies under our coverage. Our top picks are Malaysian upstream players, namely, Sarawak Plantation and Ta Ann as their recorded CPO prices are more reflective of the current CPO prices in Malaysia given that they are not subject to the steep discount in Indonesia and majority of their CPO sales based on spot pricing.

• Raising CPO price forecasts. In view of the stronger-than-expected CPO price performance, we revise up our 2022 CPO price forecast from RM3,500/mt to RM4,300/mt. For 2023, we raise our CPO price forecast from RM3,500/mt to RM3,800/mt. We think CPO price will remain strong in the 1H of 2022. Thereafter, CPO prices should ease as we expect production to increase when the foreign workers start returning to Malaysia.

Source: PublicInvest Research - 18 Feb 2022