CPO price will likely remain at elevated levels in the next few months (possibly until 1H22), supported by (i) weaker production outlook for corn and soybean in South America, and (ii) Indonesian government’s recent move to expand its export permit requirement for all palm oil products, which will likely disrupt palm oil supply chain. While we continue to believe that a pullback in CPO price will materialise when palm oil output recovers, this hinges on several uncertainties. Besides, ESG concerns on the sector may have hit rock bottom and should ease soon. We raise our 2022-24 CPO price forecasts to RM4,300/3,300/3,300 per tonne (vs. RM3,500/2,900/2,900 per tonne previously). Earnings forecasts and TPs on individual planters (to reflect high CPO price and production cost assumptions) will be adjusted in the upcoming results season. Maintain Overweight stance on the sector. Top picks are IOI Corp (BUY; TP: RM4.35), KLK (BUY; TP: RM25.33) and Sime Darby Plantation (BUY; TP: RM4.48).

Near-term CPO price to remain elevated. We believe CPO price will remain at elevated levels in the next few months (possibly until 1H22), supported by (i) weaker production outlook for corn and soybean in South America (witnessed by USDA, Conab and Buenos Aires Grains Exchange’s recent moves to trim soybean and corn production estimates in Brazil and Argentina), and (ii) Indonesian government’s recent move to expand its export permit requirement for all palm oil products including derivatives (effective from 15 Feb 2022), which will likely disrupt palm oil supply chain.

Beyond 1H22 – recovery of vegetable oils hinges on several uncertainties. While we continue to believe that a pullback in CPO price will materialise when palm oil output recovers, 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.

ESG concerns have hit rock bottom and should ease soon, we believe. Sime Darby Plantation (SDPL) has recently announced several changes and improvements to its governance structures, policies and procedures. These include (i) reimbursing recruitment fees to its current and past foreign workers (totalling RM82m), (ii) establishment of an improved Responsible Recruitment Procedure, and (iii) implementation of new processes to enable better dialogue with workers. We are positive on the latest development, as it demonstrates SDPL’s proactive measures to resolve the US CBP ban issues by implementing the abovementioned changes. Besides, we note that US CBP has engaged with Malaysian government and industries regarding the forced labour allegations and will step up discussions to address the issues, and we believe this should pave the way to lay forced labour allegations to rest.

CPO price forecasts raised in 2022-2024. We raise our 2022 CPO price forecast to RM4,300/mt (from RM3,500/mt previously), in anticipation of the tight supply situation of vegetable oils (including palm oil), which will continue to lend support to CPO price for the next few months. For 2023-24, we raise our CPO price forecast to RM3,300/mt (from RM2,900/mt), as we believe a recovery to palm oil production will take longer than expected.

Maintain earnings forecasts, TPs and ratings for now… We will only adjust earnings forecasts, TPs and ratings on individual planters (to reflect high CPO price and production cost assumptions) in the upcoming results season (starting from 17 Feb 2022).

Maintain OVERWEIGHT stance. Maintain our OVERWEIGHT stance on the sector, underpinned by (i) high near term CPO prices (which will in turn translate to good near term earnings prospects), (ii) easing ESG concerns, and (iii) decent valuations. Top picks remain IOI Corp (BUY; TP: RM4.35), KLK (BUY; TP: RM25.33) and Sime Darby Plantation (BUY; TP: RM4.48).

Source: Hong Leong Investment Bank Research - 16 Feb 2022