Malaysia’s palm oil inventory registered its first gain in 6 months, up 11.5% to 1.64m mt, as high CPO prices deterred buying interests. CPO futures slipped to the current level of RM6,377/mt after hitting record level of RM7,104/mt a week ago. Meanwhile, we maintain our Overweight call on the plantation sector with a full-year CPO price forecast of RM4,300/mt. Our top picks are Sarawak Plantation and Ta Ann.

• Palm oil inventory registered first gain in 6 months. Palm oil stockpiles jumped to a 5-month high at 1.64m mt in April as production rose while exports fell to the lowest level in 14 months. Stock-to-usage ratio rose from 8% to 10%.

• Exports slipped to 14-month low. Palm oil exports contracted 17.7% to 1.0m mt, the lowest level in 14 months as all major consuming countries except US (+25.8%) showed weaker demand. Pakistan registered the steepest drop, down 90% followed by China, 51% and EU, 23%.

• Output grew for second straight month. After seeing a sharp palm oil production growth in the previous month, palm oil extended its gain by another 3.6% MoM to 1.46m mt, the highest level in 5 months. The higher production was contributed by Peninsular Malaysia (+2.7%) and East Malaysia (+4.9%).

• Earnings surprise for the first quarter? In view of the stronger-than expected CPO price performance for 1Q 2022, we do not rule out the possibility of earnings surprises especially Sarawak Plantation and Ta Ann as both are not exposed to the hefty duties in Indonesia and almost all of their CPO sales are in spot prices. During the first quarter, KLK registered the steepest FFB production growth, up 23.4%, followed by FGV, 11.8% and IOI Corp, 8.9%. (refer to Figure 5)

• Foreign workers returning soon. The Malaysia’s Plantation and Industries and Commodities Ministry is eyeing 30% growth for production and exports amid increased demand after Indonesia banned exports and following the re-entry of plantation workers. In Sept, authorities approved the recruitment of 32,000 foreign workers for palm oil plantations and some are expected to arrive this month and in June under a special government quota. The ministry has proposed cutting the export tax on CPO from the current 8% to 4%-6% next month as it aims to boost its global market share.

Source: PublicInvest Research - 11 May 2022