• Inventory ended higher, increased by 11.5% mom to 1.64m tonnes in April.

• Production improved by 3.6% mom to 1.46m tonnes.

• Palm oil exports declined by 17.7% mom to 1.05m tonnes.

• Maintain Overweight call on the sector with average CPO price forecast of RM5,000/MT and RM3,500/MT for 2022 and 2023 respectively.

Closing stocks increased by 11.5% mom to 1.64m tonnes

Malaysia’s palm oil stocks increased by 11.5% mom to end at 1.642m tonnes in Apr22 no thanks to a 17.7% mom drop in exports – the lowest for April (946.7k tonnes recorded in April 2004) as major importing countries like India, China, EU, Pakistan, Kenya and Turkey (Table 2) reduced their PO intake – likely due to higher PO price in the international market and therefore, PO lack its price competitiveness. Overall, the higher PO end-stocks were due to higher stocks for both the CPO and PPO (processed palm oil), which jumped by 17.4% and 5.2% respectively to 891,779 tonnes and 750,215 tonnes during the period. Compared to a year ago, the stockpiles remained higher, increasing by 6.2% YoY to 1.64m tonnes (Apr21: 1.55m tonnes).

We expect stock level in the next couple of months to hover in the region of 1.60m tonnes to 1.70m tonnes, in view of 1) higher production momentum (note: seasonally higher PO productive month), 2) slower demand post-festivities, and 3) slower PO intake from China due to strict COVID-19 lockdown policies. Nonetheless, the tight supply situation of sunflower oil (if the geopolitical tension between Russia and Ukraine prolongs) and a major hiccup in soybean oil supply from South America will benefit PO demand in the near term.

Production improved by 3.60% mom to 1.46m tonnes.

CPO production increased by 3.6% mom (-4.33% YoY) to 1.462m tonnes in April 2022 mainly due to higher OER achieved across the country except for Negeri Sembilan which dropped slightly by 0.1% to 19.70% against 19.72% recorded in Mar22. Conversely, year-to-date CPO production improved by 1.5% YoY to 5.264m tonnes as opposed to 5.186m tonnes registered in Apr21.

Maintain average CPO price forecast of RM5,000/MT for 2022 and RM3,500/MT for 2023.

The CPO prices in the derivatives market traded in a volatile mode with an upward bias in April driven by concerns over Indonesia’s plan to ban the export of palm oil. Nonetheless, concerns over higher PO production and slower export performance especially from China has capped the upside. As such, the average CPO price at Bursa Derivatives Market (BMD) closed relatively lower at RM6,223.05/MT (-0.6% mom) with the CPO price for local delivery settled to an average of RM6,678/MT against RM6,867/MT recorded in the previous month. As for Jan-Apr 2022 period, the MPOB average CPO price of RM6,208/MT was higher by RM2,231/MT or 56.1% against RM3,976/MT recorded in the same period last year

We retain the view that the CPO price would retain its upward trajectory to trade above RM6,000/MT until the Eid Fitri celebration in the short term before normalizing to RM4,000/MT-RM5,000/MT in the later part of 2Q22 or in 2H22 when the Indonesian government lifts the exports ban, which also coincides with higher palm oil production month. In light of these developments, we foresee that the price (MPOB-local delivery) for May-June 2022 would trade within a range of RM7,500/MT - RM5,500/MT as opposed to RM3,471.50/MT - RM4,773.50/MT during the same period last year.

Downside risks for CPO price include 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 price differential between CPO and SBO, 5) weakening of crude oil prices, and 6) unprecedented events i.e., prolonged Covid-19 pandemic with a new variant and another round of movement restriction worldwide, and Russia-Ukraine conflict.

Maintain “Overweight”

Maintain Overweight call on the sector as we expect plantation companies’ earnings risk to remain firmly on the upside as CPO price is expected 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 a 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 a HOLD recommendation on FGV (TP: RM1.82) and TSH (TP: RM1.49); and non-rated for TH Plant.

Source: BIMB Securities Research - 11 May 2022