• Palm Oil (PO) end-stocks contracted by -4.6% on a MoM basis to 2.29mn tonnes in December 2023, attributed to a 13.3% drop in production to 1.55mn tonnes, despite a -5.1% MoM reduction in export volume to 1.33mn tonnes, and a moderation in imports, which decreased by -7.9% MoM to 36.6k tonnes.

• We anticipate that CPO prices will remain stable in the range of RM3,600/MT to RM4,000/MT in 2024, despite facing multiple challenges, including disruptions in vessel turnaround time due to geopolitical tensions and the ongoing global economic slowdown.

• Maintain a NEUTRAL call on the sector with a base-case 2024 average CPO price forecast of RM3,600/MT, given the risk of challenging earnings on the back of lower palm products price and higher operating costs.

December closing stocks eased further. Malaysia's December palm oil end-stocks eased further to 2.29mn tonnes (-4.6% MoM, +4.3% YoY), mainly due to lower production (-13.3% MoM, -4.2% YoY to 1.55mn tonnes) despite a decline in export figures (-5.1% MoM, -9.5% YoY to 1.33mn tonnes). The industry is currently experiencing a low productive phase, with the monthly decline in CPO production that can be traced to weakening in FFB yield and oil extraction rate (OER) nationwide. Subdued export performance is likely a result of slower demand from major importing countries on normalization of restocking activities, and increased competition from Indonesia and other edible oils such as soybean oil, rapeseed, and sunflower oil. Overall, the lower inventory can be attributed to a decrease in CPO stocks, which declined by -9.4% MoM to 1.2mn tonnes during this period.

Outlook. Moving forward, the outlook for 2024 is anticipated to be challenging, as indicated by the World Bank's latest 'Global Economic Prospects,' forecasting a global growth slowdown for the third consecutive year to 2.4% in 2024 from 2.6% in 2023. The report highlights increased geopolitical tensions, adding fresh near-term challenges. These factors are expected to compound existing issues in the plantation sector, which is currently grappling with persistent challenges such as volatility and uncertainties in palm product prices, muted demand, escalating costs, especially in 2H 2024 with the implementation of the Subsidy Regionalisation Initiatives (SRI) and another round of minimum wage parameters. Additionally, production in the country could get a boost from better availability of labour, normalization of manuring activities and new areas coming into production. We believe CPO production to improve in 2024, reaching around 18.86mn tonnes, while ending stocks are anticipated to be close to approximately 2.16mn tonnes. Export demand is projected to remain supported at 16.27mn tonnes (Table2).

Against this backdrop, positive catalysts in 2024 include i) near-term trend of palm product prices still convincing given the prospect of supply disruption due to climate/weather related issues that will potentially impact the edible oils supply and prices, ii) an unanticipated recovery in demand, particularly from China and India that could surpass initial expectations, iii) more stringent Indonesia’s export duty and levy policy for PO, and iv) heightened geopolitical tensions that is causing disruptions to global shipping trade. The combination of higher demand and tighter supply for palm oil products is expected to push up prices, benefiting industry players.

CPO price to remain stable. Taking into account the various factors mentioned above, we are of the view that (MPOB-local delivery) CPO prices to remain stable within a range of approximately RM3,600/MT to RM4,000/MT in the near term. However, there exists a possibility of a surprise positive development where price may surpass RM4,000/MT in the event of an unprecedented occurrence of weather effect, particularly with the lag impact of El-Nino in Indonesia, which could impact the supply of palm oil.

Sector NEUTRAL recommendation. We maintain a NEUTRAL stance on the plantation sector, projecting an average base-case CPO price of RM3,600/MT for 2024. This is driven by a concerns over potential downside risks in CPO prices and escalating operating costs, which may impact the earnings performance of plantation companies, especially in the upstream segment. Nevertheless, we recommend long-term investors to consider accumulating shares of companies with higher growth potential in FFB production and/or downstream involvement, as well as those demonstrating solid fundamentals and efficient estate management practices.

Our BUY call for plantation stock are IOI (TP: RM4.50) and KLK (TP: RM24.05). Maintain 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 - 11 Jan 2024