We are maintaining our Neutral rating on plantation sector (with unchanged CPO price assumptions of RM3,200/mt in 2021 and RM2,800/mt in 2022-23), as we believe CPO price will trend down more noticeably in 2H21, on the back of (i) improving supply visibility for most vegetable oils in coming season, and (ii) limited demand growth potential for vegetable oils (including palm oil) amidst high vegetable oil prices. For exposure, our top picks are IOI Corp (BUY; TP: RM4.67) and KLK (BUY; TP: RM26.42), and TSH Resources (BUY; TP: RM1.20).

CPO price to trend down more noticeably in 2H21. We continue to hold the view that CPO price will trend down more noticeably in 2H21, on the back of (i) improving supply visibility for most vegetable oils in coming season, and (ii) limited demand growth potential for vegetable oils (including palm oil) amidst high vegetable oil prices .

Soybean output prospects improve. USDA’s crop progress report indicated that US farmers planted 87.56m acres of soybean in marketing year 2021-22, 5.4% higher than soybean planted area in previous year. Over in Brazil, USDA’s Foreign Agricultural Service (FAS) projects soybean planted area in Brazil to reach 40m ha in 2021-22 season (from 38.5m ha in 2020-21 season). Higher estimated acreage will result in soybean production in Brazil rising by 5% to 141m mt in 2021-22 season (from 134m mt estimated in 2020-21 season).

Anticipate seasonal pick up in palm production. Despite having anticipated labour shortfall issue in Malaysia to persist into end-2021, we believe palm oil production in Malaysia will still come in higher in 2H (vs. 1H) on the back of seasonal factor. We also anticipate palm oil production in Indonesia to remain on uptrend (albeit a slower growth relative to previous years, due to a slowdown in new plantings in the past few years), due to seasonal factor and more conducive weather conditions.

Glimmer of hope for Malaysia’s labour situation. Malaysian government is now aiming to fast track Covid-19 vaccinations for workers in essential economic sectors (such as construction and plantation sectors). We believe such development provides a glimmer of hope in easing labour shortfall issue in Malaysia (once the pace of inoculation picks up), hence resulting in a recovery in palm oil output in Malaysia.

High palm oil price will result in demand pullback. The surge in palm oil price has yet to result in demand pullback in a major way so far, as (i) current high palm oil price is driven mainly by supply shortage of major vegetable oils (including soybean and palm oil) and low inventory levels among major importing countries, and (ii) palm’s price competitiveness over other competing oils. We believe a pullback in palm demand will kick in when a recovery in supply of major edible oils is in sight amidst the absence of fresh demand catalyst, hence resulting in weaker CPO price.

Wide price gap between palm oil and soybean oil will likely remain in the near future. CPO’s price discount to soybean oil has narrowed from an all-time-high of ~US$590/mt (in mid-June) to ~US$426/mt currently. We believe the wide price gap between the two will likely remain in the near future, given current tightness in soybean supply and seasonal pick up in palm production.

Maintain CPO price assumptions. We maintain our CPO price assumptions of RM3,200/mt for 2021 and RM2,800/mt for 2022-23, as we believe CPO price has already peaked, on the back of increasing optimism on vegetable oil supplies and absence of fresh demand catalyst.

Maintain Neutral. Maintain Neutral rating. Top picks are IOI Corp (BUY; TP: RM4.67) and KLK (BUY; TP: RM26.42), and TSH Resources (BUY; TP: RM1.20).

Source: Hong Leong Investment Bank Research - 2 Jul 2021