We believe CPO price will trend down more noticeably from 2H21 onwards, on the back of (i) better supply outlook for soybean output (particularly, in US and Brazil), (ii) seasonally higher palm oil output in 2H, and (iii) demand pullback, when a recovery in supply of major edible oils kicks in. We raise our CPO price assumption for 2021 to RM3,200/mt (from RM2,700/mt), mainly to reflect (i) strong average CPO price registered in 1Q21, and (ii) supply tightness in vegetable oils, which will likely persist into end-2Q21. For 2022-23, we raise our CPO price assumption to RM2,800/mt (from RM2,700/mt) in 2022-23, as we anticipate supply of vegetable oil (in particular, soybean and palm oil) will have returned to normalcy by then. Post revisions in TPs, we upgrade our rating on IOI Corp (from Hold to BUY) and downgrade our rating on Hap Seng Plantations (from Buy to HOLD). Ratings for other plantation stocks, on the other hand, remain unchanged. We maintain our NEUTRAL stance on the sector. Our top picks are IOI Corp (BUY; TP: RM4.67), KLK (BUY; TP: RM26.64), IJM Plantations (BUY; TP: RM2.31), and TSH Resources (BUY; TP: RM1.18).

CPO price to remain elevated at above RM3,500/mt mark in 2Q21. We believe CPO price will start easing from 2Q21 (albeit on a gradual basis) on the back of the absence of weather disruption, and improving supply prospects of soybean. Nevertheless, we believe CPO price will still remain elevated at above RM3,500/mt in 2Q21, supported by (i) supply tightness in major edible oils, (ii) still-tight edible oil inventory levels for major consuming countries, which will sustain near term inventory replenishing activities, (iii) competitive CPO price relative to other edible oils, and (iv) biodiesel mandate in Indonesia, which curbs supply of palm oil.

CPO price to trend down more noticeably in 2H21. CPO price will likely trend down more drastically in 2H21, on the back of (i) better supply outlook for soybean output (particularly, in US and Brazil, which collectively account for ~65% of the world’s total soybean output), (ii) seasonally higher palm oil output in 2H, and (iii) demand pullback, when a recovery in supply of major edible oils is in sight amidst the absence of fresh demand catalyst.

Viability of biodiesel remains questionable. High Palm Oil – Gas Oil (POGO) spread continues to raise questions on economic viability of existing biodiesel mandates (in Indonesia, Malaysia, Brazil, US and Europe). The risk of such revision will lower demand for edible oils, hence weighing down on vegetable oil prices. It is worth noting that Brazillian government has recently announced a reduction in its mandatory biodiesel admixture from 13% to 10%, due to skyrocketing feedstock price and depreciation of the Brazilian Real.

Forecasts. We raise our CPO price assumption for 2021 to RM3,200/mt (from RM2,700/mt), mainly to reflect (i) strong average CPO price registered in 1Q21 (RM3,919/mt), and (ii) supply tightness in vegetable oils, which will likely persist into end-2Q21. For 2022-23, we raise our CPO price assumption by RM100/mt to RM2,800/mt in 2022-23, as we anticipate supply of vegetable oil (in particular, soybean and palm oil) will have returned to normalcy by then.

Rating changes. Post revisions in TPs, we upgrade our rating on IOI Corp (from Hold to BUY) and downgrade our rating on Hap Seng Plantations (from Buy to HOLD). Ratings for other plantation stocks, on the other hand, remain unchanged.

Stay NEUTRAL. Despite the upward revision in our CPO price assumptions, we maintain our NEUTRAL stance on the sector, as we believe current high CPO price will not sustain over the longer term. For exposure, our top picks are IOI Corp (BUY; TP: RM4.67), KLK (BUY; TP: RM26.64), IJM Plantations (BUY; TP: RM2.31), and TSH Resources (BUY; TP: RM1.18).

Source: Hong Leong Investment Bank Research - 12 Apr 2021