• Palm Oil (PO) end-stocks contracted by -1.1% on MoM basis to 2.42mn tonnes in November 2023, as production dropped by - 7.7% to 1.79mn tonnes, despite lower exports volume (-5.7% MoM to 1.40mn tonnes). The decrease was further supported by a moderation in import (-16.5% MoM to 39.7k tonnes) and an increase in local intakes.

• CPO prices are expected to remain supported, considering the attractive discount between the PO price and SBO price, which is currently hovering around USD300/MT to USD350/MT. Consequently, we uphold our trading range estimates, expecting fluctuations within approximately RM400/MT above or below RM3,800/MT in the near term

• Maintain a NEUTRAL call on plantation sector with average CPO price forecast of RM3,790/MT-RM3,600/MT for 2023-2024; given that most companies under our coverage, this year, may face with heightened risk of challenging earnings on the back of lower palm products price (vis-à-vis of last year) and higher operating costs.

Closing stocks eased in November. In November, Malaysia's palm oil end-stocks eased to 2.42mn tonnes (-1.1% MoM, +5.6% YoY), primarily attributed to a drop in production (-7.7% MoM to 1.79mn tonnes) despite less-than-impressive export figures (-5.7% MoM, - 8.2% YoY to 1.40mn tonnes). The decline in CPO production on a monthly basis can be traced to weakened FFB yield and oil extraction rate (OER) nationwide, as the industry entered into a low productive phase. Conversely, subdued export performance is likely due to slower demand from major importing countries as restocking activities normally turn slower post-festivities compounded by an increase in competition from Indonesia and other edible oils such as soybean oil, rapeseed and sunflower oil. Overall, lower inventory was attributed to a decrease in stocks for CPO which declined by - 3.9% MoM to 1.34mn tonnes during this period. Having said that, demand could be at risk not only because of slower economic growth from major importing countries, but also from economic uncertainties and higher competition from other edible oil, especially soybean oil.

Looking ahead, we anticipate CPO production may fall behind our initial target of 18.85mn tonnes, likely concluding the year within the range of 18.65mn to 18.75mn tonnes. Concurrently, stock levels are expected to remain elevated, ranging between 2.2mn and 2.4mn tonnes. This expectation is underpinned by two factors, namely: 1) subdued demand that typically follows post-festivities due to the completion and normalization of replenishment activities, and 2) heightened competition from Indonesia and other edible oils, particularly Soybean Oil (SBO), rapeseed oil, and sunflower oil.

CPO price is expected to stay supported. We maintain our view that (MPOB-local delivery) CPO prices is likely to hover around RM400/MT above or below RM 3,800/MT in the near term. This is based on: 1) the discount of PO price compared to SBO price that remains attractive – Table 1, 2) a weaker Ringgit, 3) an increase in the biofuel mandate, 4) slower growth in palm oil supply from Malaysia due to reduced yields caused by Covid-19-related challenges, including low productivity from new workers and insufficient fertilizer application, along with aging of palm oil estates (MPOA estimates 664,000ha or about 12% of the nation’s planted area consists of trees aged 25 years and above while over 33% of the planted area could be classified as old by 2027), and 5) the severity of El-Nino climate phenomenon, a worry for many climate experts, is predicted to significantly affect global agriculture, including the production of palm oil especially in Indonesia.

Maintain a NEUTRAL call on plantation sector with average CPO price forecast of RM3,790/MT-RM3,600/MT for 2023-2024; as most companies under our coverage, this year, may face with heightened risk of challenging earnings on the back of lower palm products price (vis-à-vis of last year) and higher operating costs. We have a BUY call on IOI (TP: RM4.50) and KLK (TP: RM24.05), and a HOLD call for SIME Darby Plants (TP: RM4.80), GENP (TP: RM6.00), Sarawak Plant (TP: RM2.16), SOP (TP: RM2.50), and TSH (TP: RM1.01); whilst a SELL on FGV (TP: RM1.23), Boustead Plants (TP: RM1.55) and HAPL (TP: RM1.70), though a non-rated for TH Plant.

Source: BIMB Securities Research - 12 Dec 2023