• Palm Oil (PO) end-stocks ended above the 2.0mn tonne psychological level or 2.09mn tonnes in August 2022 on account of lower export (-1.9% MoM to 1.30mntonnes) and higherCPO production (+9.7% MoMto 1.73m tonnes).

• Demand was dampened, among others, by challenging global economic outlook and elevated level of inflation.

• Maintain a Neutral call on the sector with 2023 CPO price average of RM3,500 per tonne, a slowdown against 2022’s average of RM5,000 per tonne.

Closing Stocks Surged to 2.09m tonnes in August

Palm Oil (PO) end-stocks in Malaysia hit above the 2.0mn tonnes psychological level or 2.09m tonnes in August, an increase of 18.2% MoM and 11.6% YoY (the highest since April 2020)lifted by higherproduction and slower exportwhich contracted by 1.9% MoM to 1.57mn tonnes. This was hampered by slower demand from India, Iran, Turkey and the USA – Table 4 though mitigated by better demand from China, EU, Netherlands, Pakistan, Japan, Kenya and Vietnam. We believe this was due to the replenishment of the said countries’ PO stocks to meet higher demand for festivities in October and December this year. Nonetheless, we are cautious on export demand moving forward as we believe demand could turn subdued due to increased competition from Indonesia as well as from other edible oils, especially soybean oil (SBO).

Overall, higherPO end-stocks were due to higher stocks for both the CPO and PPO (processed palm oil), which increased by 13.2%YoY and 23.3% YoY respectively to 1.03mn tonnes and 1.07mn tonnes. Closing PO stocks could remain elevated in the next couple of months, expected to hover in the region of 1.95mn tonnes to 2.05mn tonnes, due to higher PO stocks and slower demand given that most of our major importing countries are on a belt tightening drive due to inflationary environment, unfavourable exchange rates and elevated level of global commodity prices.

Maintain CPO Price Forecast of RM5,000/MT for 2022 and RM3,500/MT for 2023.

CPO prices in the derivatives marketfor the month of Augusttraded in a volatile mode, tracking the price movement in the soybean oil market amid concerns overslower demand and higher stocks and PO supply from Malaysia and Indonesia given that the sector is currently in the seasonally higher palm oil productive month. Nonetheless, PO price was well supported by positive sentiment from the SBO market which has traded above USD60 cents/bushel. This is followed by the widening discount of price differential between PO and SBO price which has made PO price more competitive giventhe current discount parity between the two oils(current: USD630/MT; 5-years average discount: USD139/MT). Hence, the average CPO price at Bursa Derivatives Market (BMD) closed relatively higherat RM4,114.64/MT (+2.7% MoM) with the CPO price for local delivery settling to an average of RM4,169/MT in August against RM4,063/MT recorded in the previous month. As for Jan-Aug 2022 period, the MPOB average CPO price of RM5,755/MT was higher by RM1,631/MT or a jump by 39.6% YoY.

On this note, we foresee that price (MPOB-local delivery) for the month of September-October 2022 would trade within a range of RM3,000/MT and RM4,000/MT as opposed to RM4,433/MT and RM5,396/MTduring the same period last year. We hold our view that CPO price in the near-to-medium term will remain supported and would average at RM4,000/MT level in the second half of this year, underpinned by 1) the widening discount of price differential between PO and SBO prices, 2) increase in biofuel mandate, 3) weaker Ringgit, 4) full-reopening of China economy (zero COVID-19 policy) to boost demand, and 5) slower growth in palm oilsupply from Malaysia on slow return of foreign worker and low fertiliser usage.

We call a Neutral on the sector in 2023 with a lower CPO price forecast of RM3,500/MT (average) against 2022’s average CPO price forecast of RM5,000/MT (average). We have a BUY call on IOI (TP: RM4.75), KLK (TP: RM28.77), SIME Darby Plants (TP: RM5.03), GENP (TP: RM7.45) and Sarawak Plant (TP: RM2.85), with a HOLD recommendation for FGV (TP: RM1.50), HAPL (TP: RM2.40), SOP (TP: RM2.95), and TSH (TP: RM1.19); and a non-rated for TH Plant.

There could be downside risks for CPO price and this may come from 1) a slower-than-expected economic growth and consumption of edible oils, 2) a lower-than-projected demand due to changes in government policies of importing and/or exporting countries, 3) a higher-thanexpected supply and stockpiles of Soybean and SBO, 4) a narrowing price differential between CPO and SBO, 5) a weakening of crude oil prices, and 6) unprecedented events i.e., prolonged COVID-19 pandemic with a new variant and therefore, another round of movement restriction worldwide, prolonged Zero COVID-19policy in China and Russia-Ukraine war conflict.