• Palm Oil (PO) end-stocks surged in May after growing by 12.6% MoM to 1.69mn tonnes, mainly driven by a 26.8% increase in CPO production and 0.8% decrease in palm oil export.

• As demand concerns outweighed the prospect of tighter supply due to weather issues (El-Nino) and stagnant yields, CPO price is expected to stay in a range of c. RM3,100/MT - RM3,700/MT in the near term.

• Maintain a NEUTRAL call on the sector with 2023/24 average CPO price forecast of RM3,500MT/RM3,000/MT respectively - given that most companies under our coverage, this year, may face with a heightened risk of challenging earnings on the back of lower palm products price and higher operating costs.

Inventory increase as production gain its momentum. PO end-stocks increased by 12.6% MoM and 10.7% YoY in May to 1.69mn tonnes, primarily driven by a 26.8% increase in CPO production and 0.8% drop in PO export. CPO production gained traction as FFB yield improved by 23% MoM to 1.23 tonnes/ha while oil extraction rate (OER) for CPO improved slightly by 0.1% to 20.01%. Production is expected to improve gradually before reaching its peak in 3Q23, specifically the month of October or early November. Having said that, demand was dampened among others, by 1) challenging global economic outlook and elevated level of inflation, and 2) narrowed discount to other major competing oils i.e., soybean oil price and sunflower oil price.

CPO Prices to stay volatile in the near term. We foresee a challenging plantation sector year given volatile palm product price, muted demand and risk of stagnant FFB yield. Our belief is rooted in the expectation that the discount gap between CPO and soybean oil will continue to narrow, leading to slowing demand from major importing countries. Additionally, macro issues such as uncertainty in global economy and inflationary pressures that has triggered volatility in the commodity market, could further dampen demand, particularly for price-sensitive importing countries like India, Pakistan, Bangladesh, Africa, and China, among others. On the other hand, concern regarding the impact of dry weather in Southeast Asia and the potential haze from Indonesian forests proved to be shortlived as the CPO price only sustained above RM4,000/MT from February to early May 2023.

The observation of declining prices is evident in the Bursa Derivatives Market (BMD), where the average CPO price closed at RM3,512.90/MT (-5.8% MoM) in May. Similarly, the average CPO price for local delivery (MPOB price) reached an average of RM3,796/MT (-10.0% MoM) during the same period. Conversely, for the January-May 2023 period, the MPOB average CPO price stood at RM3,969/MT, indicating a YoY drop of RM2,372/MT, or -37%.

We retain our NEUTRAL recommendation on the sector as most companies under our coverage are at risk of further earnings disappointment on account of challenging operating environment, primarily higher operational costs (i.e., fertilizer cost, diesel prices, electricity costs and labour costs to name few) and the expected moderation in palm products price. This supports our believe that palm oil production recovery may be offset by lower palm product prices. We have a BUY call on IOI (TP: RM4.75), with a HOLD call for KLK (TP: RM24.53), SIME Darby Plants (TP: RM4.62), GENP (TP: RM5.87), Sarawak Plant (TP: RM2.03), FGV (TP: RM1.25), HAPL (TP: RM1.79), and TSH (TP: RM1.02); whilst a SELL on SOP (TP: RM2.05) and Boustead Plants (TP: RM0.65), though a non-rated for TH Plant.

Source: BIMB Securities Research - 13 Jun 2023