Palm oil stockpile remained on an uptrend, rising by 18.2% MoM to 2.09m tonnes in Aug-22, boosted by higher output and lower exports. We believe stockpile will remain elevated in Sep-22, on the back of seasonally higher output trend and Indonesian government’s move to accelerate palm oil exports. This will in turn, drag palm oil exports from Malaysia, which will more than offset potentially higher demand from India (arising from restocking activities ahead of festive season). 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: RM26.80) and IOI (BUY; TP: RM4.65) over purer upstream players.

DATA HIGHLIGHTS

Uptrend in palm oil stockpile continued. Palm oil stockpile remained on an uptrend, rising by 18.2% MoM to 2.09m tonnes in Aug-22, boosted by higher output and lower exports. The stockpile came in marginally higher than Bloomberg median estimate’s 2.05m tonnes, due mainly to lower-than-expected exports.

Output remained on uptrend. Palm oil output increased for the third consecutive month, by 9.7% MoM to 1.73m tonnes in Aug-22, mainly on the back of seasonal factor (with output contribution from Peninsular Malaysia and East Malaysia rising by 4.4% and 16.9%, respectively). YTD, output fell marginally (by 0.2%) to 11.57m tonnes in 8M22, dragged mainly by a 2.0% decline in East Malaysia’s output.

Marginal decline in exports. Exports declined marginally, by 1.9% MoM to 1.3m tonnes in Aug-22, as the increase in exports of CPO (+0.4%) was more than offset by a decline in processed palm oil (-2.8%). Geographically, higher exports to China (+128.9%) and EU (+80.4%) were moderated by lower exports to India (-9.2%), Iran (-30.6%), Philippines (-41.5%), Saudi Arabia (-38.0%), and Turkey (-47.2%).

Exports for the first 10 days of Sep-22. Preliminary data from Amspec and Intertek indicated that palm oil exports increased by 9.3-16.2% MoM (to 340-424k tonnes) during the first 10 days of Sep-22.

HLIB’s VIEW

Stockpile to remain elevated in Sep-22. Stockpile will likely remain elevated in Sep- 22, on the back of seasonally higher output trend and Indonesian government’s move to accelerate palm oil exports. This will in turn, drag palm oil exports from Malaysia, which will more than offset potentially higher demand from India (arising from restocking activities ahead of festive season).

Forecast. After hitting an all-time-high of RM8,074/tonne in early Mar-22, CPO price has been trending down (and averaging at RM5,648/tonne YTD), on Indonesia’s move to flush out palm oil inventories, which will likely suppress near term CPO price. We maintain 2022-24 CPO price assumptions of RM5,500/4,500/3,800 per tonne, as we continue to believe that CPO price will start recovering once stockpile in Indonesia normalises.

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: RM26.80) and IOI (BUY; TP: RM4.65) 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 Sept 2022