Palm oil stockpile increased by 7.7% MoM to 1.77m tonnes in Jul-22, boosted by higher output and lower domestic consumption, but partly moderated by higher 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. Maintain 2022-24 CPO price assumptions of RM5,500/4,500/3,800 per tonne, and Overweight stance on the sector. 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 remains on uptrend. Palm oil stockpile increased by 7.7% MoM to 1.77m tonnes in Jul-22 (matching Bloomberg consensus median estimate), boosted by higher output and lower domestic consumption, but partly moderated by higher exports.

Output rose on seasonal factor. Output increased by 1.8% MoM to 1.57m tonnes in Jul-22, on seasonal factor (with output contribution from Peninsular Malaysia and East Malaysia estates rising by 2.3% and 1.2%, respectively). YTD, output fell marginally (by 0.4%) to 9.84m tonnes in 7M22, dragged mainly by lower output in East Malaysia.

Exports resumed on uptrend. Exports increased by 10.7% MoM to 1.32m tonnes in Jul-22, boosted mainly by higher exports to India (+51.2%), while exports to China remained slow. YTD, exports rose marginally (by 0.5%) to 8.52m tonnes in 7M22.

Exports for the first 10 days of Aug-22. Preliminary data from Amspec indicated that palm oil exports increased by 10% MoM to 340k tonnes during the first 10 days of Aug- 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 (which will in turn drag palm oil exports from Malaysia), and the absence of seasonal-driven demand catalyst.

Forecast. Maintain 2022-24 CPO price assumptions of RM5,500/4,500/3,800 per tonne. 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, low inventory levels among major importing countries, and favourable POGO spread.

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. 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 - 11 Aug 2022