Palm oil increased by 8.8% MoM to 1.66m tonnes in Jun-22, boosted by higher output and lower exports. Stockpile will likely increase further in coming month, on the back of seasonally higher output trend, Indonesian government’s move to accelerate palm oil exports, and the absence of seasonal-driven demand catalyst. We maintain our 2022/23/24 CPO price assumptions of RM5,500/4,500/3,800 per tonne, and OVERWEIGHT stance on the sector, supported by (i) an anticipated recovery in CPO price; and (ii) commendable valuations (after recent sharp retracement in share prices). For exposure, we prefer integrated players such as KLK (BUY; TP: RM26.54) and IOI (BUY; TP: RM4.36) over purer upstream players.

DATA HIGHLIGHTS

Stockpile resumed on uptrend. Palm oil stockpile increased by 8.8% MoM to 1.66m tonnes in Jun-22, boosted by higher output and lower exports. The stockpile came in below Bloomberg consensus median estimate of 1.72m tonnes, due mainly to lower-than-expected output.

Output rose on seasonal factor. Output increased by 5.7% MoM to 1.55m tonnes in Jun-22, as peak production season began (with output contribution from Peninsular Malaysia estates increased by 8.3% MoM, while East Malaysia estates increased by a smaller magnitude of 2.5%). YTD, output fell by 1.1% to 8.27m tonnes in 1H22, dragged mainly by lower output in East Malaysia.

Exports fell in Jun-22. Exports fell by 13.3% MoM to 1.19m tonnes in Jun-22, dragged mainly by Indonesian government’s move to flush out palm oil inventories accumulated since May-22. YTD, exports increased marginally, by 1.8% to 7.2m tonnes in 1H22.

Exports for the first 10 days of Jul-22. Preliminary data from Intertek and Amspec indicated that palm oil exports for the first 10 days of Jul-22 declined by 15.2-20.5% MoM during the first 10 days of Jul-22.

HLIB’s VIEW

Uptrend in stockpile to continue in coming month. Stockpile will likely increase further in coming month, on the back of seasonally higher output trend, Indonesian government’s move to accelerate palm oil exports, and the absence of seasonal-driven demand catalyst.

Forecast. CPO price has fallen by >45% from its peak of RM8,074/mt in early Mar-22, averaging at RM6,209/mt YTD. While Indonesia’s move to flush out palm oil inventories will likely suppress near term CPO price, the recent severe CPO price decline is overdone, as (i) supply prospects of major vegetable oil remains uncertain; and (ii) demand prospects have turned more favourable, on the back of palm’s improved price competitiveness (following recent correction), low inventory levels among major importing countries, and more favourable POGO spread. Hence, we maintain our 2022-24 CPO price assumptions of RM5,500/4,500/3,800 per tonne.

Maintain OVERWEIGHT; integrated players preferred. We maintain our OVERWEIGHT stance on the sector, supported by (i) an anticipated recovery in CPO price; and (ii) commendable valuations (after recent sharp retracement in share prices). For exposure, we prefer integrated players such as KLK (BUY; TP: RM26.54) and IOI (BUY; TP: RM4.36) over purer upstream players, as earnings of integrated players tend to be better insulated amidst volatile palm product price trend.

Source: Hong Leong Investment Bank Research - 13 Jul 2022