Palm oil stockpile climbed by 25.3% MoM to 1.87m tonnes in Aug-21 (higher than Bloomberg consensus median estimate of 1.74m tonnes), boosted mainly by higher output and lower exports. While the latest data is bearish for CPO near-term CPO price sentiment, we believe signs of export recovery (Am spec estimated that palm oil exports surged 50.5% YoY to 555k tonnes during the first 10 days of Sep-21) and expectation of India extending cuts on edible oil import taxes will remain supportive for CPO price. Maintain 2021 -23 CPO price assumptions of RM3,800/mt, RM2,900/mt and RM2,800/mt, respectively. Maintain OVERWEIGHT stance on the sector. Top picks are IOI Corp (BUY; TP: RM4.44), KLK (BUY; TP: RM25.33), Sime Darby Plantation (BUY; TP: RM4.99) and TSH Resources (BUY; TP: RM1.31).

DATA HIGHLIGHTS

Stockpile surged 25.3% on higher output and lower exports. Palm oil stockpile climbed by 25.3% MoM to 1.87m tonnes in Aug-21, boosted mainly by higher output and lower exports. The stockpile surpassed Bloomberg consensus median estimate of 1.74m tonnes, due mainly to weaker-than-expected exports.

Highest output since Oct-20. Output rose 11.8% MoM to 1.7m tonnes in Aug-21 (highest since Oct-20, with most states recorded higher output), on the back of seasonal factor. On YoY basis, output remained on a downtrend (declining by 8.6% YoY), due mainly to labour shortfall (arising from a migrant worker hiring freeze since early-2020).

Exports fell further in Aug-21. Exports fell for the second consecutive month, by 17.1% MoM to 1.16m tonnes in Aug-21, dragged mainly by lower exports to China and EU region (but partly cushioned by higher exports to India, as low inventory level drove restocking activities, in our view).

HLIB’s VIEW

Forecast. While the latest data is bearish for CPO near-term price sentiment, we believe signs of export recovery (Amspec estimated that palm oil exports surged 50.5% YoY to 555k tonnes during the first 10 days of Sep-21) and expectation of India extending cuts on edible oil import taxes will remain supportive for CPO price. Maintain 2021-23 CPO price assumptions of RM3,800/mt, RM2,900/mt and RM2,800/mt, respectively.

Maintain OVERWEIGHT stance. While we continue to believe that current high CPO price will not sustain over the longer term, we believe a re-rating is warranted on the sector’s palatable valuations (particularly following the devaluation during the past few months) and good near term earnings prospects (arising from elevated CPO prices). Hence, we retain our Overweight stance on the sector. Top picks are IOI Corp (BUY; TP: RM4.44), KLK (BUY; TP: RM25.33), Sime Darby Plantation (BUY; TP: RM4.99) and TSH Resources (BUY; TP: RM1.31).

Source: Hong Leong Investment Bank Research - 13 Sept 2021