Palm oil stockpile shrank by 3.9% MoM to 1.55m tonnes in Jan-22, as lower opening stocks, imports, and output more than offset an 18.7% decline in exports. Moving into Feb-22, we believe weak exports to China (arising from seasonal factor) and India (on the back of high prices) will be mitigated by seasonally lower palm production cycle (exacerbated by the onset of La Nina episode and labour shortfall). We maintain our OVERWEIGHT stance on the sector, underpinned by good near term earnings prospects (arising from elevated CPO prices) and commendable valuations. Top picks are IOI Corp (BUY; TP: RM4.35), KLK (BUY; TP: RM25.62), and Sime Darby Plantation (BUY; TP: RM4.48).

DATA HIGHLIGHTS

Stockpile remained on downtrend. Palm oil stockpile remained on downtrend (for the third consecutive month), declining by 3.9% MoM to 1.55m tonnes in Jan-22, as lower opening stocks, imports, and output more than offset an 18.7% decline in exports. The stockpile missed Bloomberg consensus median estimate of 1.58m tonnes, due mainly to lower-than-expected output.

Weakest output since Feb-21. Total output fell 13.5% MoM to 1.25m tonnes in Jan- 22 (the lowest level since Feb-21), due mainly to seasonal factor and persistent labour shortage.

Exports remained on downtrend too. Exports remained on downtrend for the second consecutive month, falling by 18.7% MoM to 1.16m tonnes in Jan-22, dragged by lower exports to most key export destinations, such as China (-48.9%), India (-41.1%) and EU (-26.2%), and Pakistan (-16.0%). We believe lower exports to key destination was due mainly to seasonal factor (as winter season typically slows palm oil demand from China) and demand destruction arising from high palm oil price.

Exports for the first 10 days of Feb-22. Preliminary data from independent cargo surveyor Amspec indicated that palm oil exports increased marginally by 0.5% MoM to 320.5k tonnes during the first 10 days of Feb-22.

HLIB’s VIEW

Forecast. Moving into Feb-22, we believe weak exports to China (arising from seasonal factor mentioned as above) and India (on the back of high prices) will be mitigated by seasonally lower palm production cycle (exacerbated by the onset of La Nina episode and labour shortfall). Maintain 2022-23 CPO price assumptions of RM3,500/2,900 per tonne. We believe CPO price will remain elevated in the near term (possibly until 1Q22), supported by (i) La Niña phenomenon, which will likely result in delay in soybean planting in South America and (ii) seasonally lower production cycle (which is expected to last until 1Q22), and this bodes well for near term CPO price. While we still hold the view that CPO price will start trending down from 2Q22 onwards, this hinges on several uncertainties including (i) the entrant of foreign workers into Malaysian shores, and (ii) surging fertiliser prices, which may result in planters (in particular smallholders) reducing fertiliser application to oil palms, hence derailing the anticipated yield recovery .

Maintain Overweight. We maintain our OVERWEIGHT stance on the sector, underpinned by good near term earnings prospects (arising from elevated CPO prices) and commendable valuations. Top picks are IOI Corp (BUY; TP: RM4.35), KLK (BUY; TP: RM25.62), and Sime Darby Plantation (BUY; TP: RM4.48).

Source: Hong Leong Investment Bank Research - 11 Feb 2022