• Inventory ended lower, fell 2.1% mom to 1.52m tonnes in February.

• Production dropped 9.3% mom to 1.14m tonnes.

• Palm oil exports slumped 5.3% mom to 1.10m tonnes.

• Maintain Overweight on the sector with new average CPO price forecast for 2022 of RM5,000/MT against RM4,500/MT estimated earlier.

Closing stocks declined 2.1% mom to 1.52m tonnes on lower production

Malaysia’s palm oil stocks fell 2.12% mom to 1.518m tonnes in February, dragged by lower output (9.3%) as production is currently in seasonally lower productive cycle. Overall, the lower PO end-stocks were due to lower stocks for both CPO and PPO (processed palm oil), which declined by 0.3% and 4.0% respectively to 784,471 tonnes and 733,822 tonnes during the period. Nonetheless, the CPO stocks for Peninsular and Sabah was relatively higher mom at 8.6% and 12.6% respectively to 383,762 tonnes and 126,824 tonnes. Compared to a year ago, the stockpiles were relatively higher, increasing by 16.3% yoy to 1.52m tonnes against 1.31m tonnes recorded in Feb21.

We expect stocks level in the next couple of months to hover in the region of 1.50m tonnes to 1.60m tonnes, in view of slower growth in production while export is expected to be muted as CPO has lost its competitiveness against SBO as the lowest price for vegetables oil to price sensitive importing countries – in view of the wider spread of CPO price premium against SBO. Off note, palm oil exports slumped 5.3% mom to 1.098m tonnes against 1.159m tonnes recorded last month with palm oil export value recorded at RM6,008m (-2.3% mom).

Production fell 9.26% mom to 1.14m tonnes.

CPO production declined 9.26% mom (+2.64% yoy) to 1.137m tonnes in Feb 2022 mainly due to lower FFB yield and OER achieved across the country with 18.7% dropped of production from Sabah, followed by Sarawak, -16.9% and Peninsular by -1.0%; - as production is currently on low cycle of production months compounded by shorter number of working days in February. Conversely, year-to-date CPO production improved 2.64% yoy to 2.391m tonnes as FFB yield in Peninsular and Sabah improved 2.9% and 17.1% yoy respectively to 1.07 tonnes/ha and 1.03 tonnes/ha against 1.04 tonnes/ha and 0.88 tonnes/ha registered in February 2021.

Change in average CPO price forecast to RM5,000/MT from RM4,500/MT previously for 2022. Crude palm oil prices for the month of February maintained their bullishness on strong market sentiment as concerns over tight supplies of vegetables oils worldwide intensified due to geopolitical tension between Russia and Ukraine. Moreover, there is possible slow growth in PO production in Malaysia on delays in foreign workers intake and soybean supply in America due to unfavourable weather conditions in the growing crops areas in South America. As such, average CPO price at Bursa Derivatives Market (BMD) closed higher at RM5,706.68/MT (+10.9% mom) with CPO price for local delivery climbing to an average of RM5,930.50/MT against RM5,354.50/MT recorded in the previous month. As for Jan-Feb 2022 period, the MPOB average CPO price of RM5,643/MT was higher by RM1,821/MT or 47.6% against RM3,822/MT recorded in the same period last year.

We retain the view that higher near-term CPO price is possible. Although price increase could be capped by the widening in spread of the price differential between CPO and SBO, currently trading at premium against SBO at USD133.8/MT against 5-yrs avg. discount at USD120.5/MT (demand may shift to SBO) - we believe this is temporary. The optimism is due to a series of positives news, in particular: 1) the tight supply of global vegetable oils due to unfavourable weather, lower yield, supply disruptions on logistics and transportation especially from the Black Seas areas, as well as government exporting policy on vegetables oil i.e., Indonesia’s Domestic Market Obligation (DMO) and Domestic Price Obligation (DPO) policies on CPO and olein, which required palm oil producer to sell 30% of their planned export to domestic market with price cap, aided by export levy and tax structure; 2) improved demand prospect due to reopening of economy, festivities and lower inventory; and 3) supply-demand mismatch due to unprecedented events i.e., COVID-19 and Russia-Ukraine tension. We are of the view that if the Russia-Ukraine conflict prolongs, there would be a supply disruption forsunflower oil, and hence, will need SBO and PO to fill the gap in supply. Based on the factors discussed earlier, we believe price will continue to be elevated in the short-to-medium term, before moderating in the later part of 2Q2022 or 3Q2022, when PO is entering its higher production month. In light of these developments, we foresee that price (MPOB-local delivery) for March-April 2022 would trade within a range of RM8,500/MT and RM6,000/MT as opposed to RM3,845.50/MT and RM4,418/MT during the same period last year. In view of above scenarios, we raised our 2022’s average CPO price forecast to RM5,000/MT from RM4,500/MT previously and maintained average CPO price forecast for 2023 at RM3,500/MT.

We believe the possible negative factors for CPO price are 1) slower-than-expected economic growth and consumption of edible oils, 2) lower-than-expected demand due to changes in government policies of importing countries, 3) higher-than-expected supply and stockpiles of Soybean and SBO, 4) narrowing of the price differential between CPO and SBO, 5) weakening of crude oil prices, and 6) unprecedented events i.e., prolonged Covid-19 pandemic with new variant and another round of movement restriction worldwide, and Russia-Ukraine geopolitical tension.

Maintain “Overweight”

Maintain Overweight on the sector as we expect plantation companies’ earnings risk to remain firmly on the upside as CPO price is anticipated to trade above RM5,000/MT (much higher than average yearly historical prices) that will amplify the revenue and earnings growth momentum up to 1Q22 or possibly for the rest of 1H22. We have BUY call on HAPL (RM2.64), SOP (RM6.00), IOI (RM5.00), KLK (RM28.40), SIME Darby Plants (TP: RM5.50), GENP (TP: RM9.57) and Sarawak Plant (RM3.64), whilst HOLD recommendation on FGV (TP: RM1.82) and TSH (TP: RM1.49); and non-rated for TH Plant.

Source: BIMB Securities Research - 10 Mar 2022