Palm oil stockpile remained on an uptrend, rising by 10.5% MoM to 2.32m tonnes in Sep-22, as higher output outpaced a 9.3% increase in exports. Stockpile will likely remain elevated in Oct-22. While low palm oil prices encourage palm oil consumption, this will likely be offset by Indonesian government’s continuous move to clear its burdensome inventory level. We are in the midst of reviewing our 2022-24 CPO price assumptions of RM5,500/4,500/3,800 per tonne (with downward bias), on the back of improving supply prospects, uncertain demand prospects (arising from economic uncertainties), as well as Indonesia’s continuous move to clear its palm oil inventories. Despite the downward bias to our CPO price assumptions, we maintain our OVERWEIGHT sta nce on the sector, supported by commendable valuations (particularly, following recent sharp correction in share prices). For exposure, we prefer integrated players such as KLK (BUY; TP: RM27.27) and IOI (BUY; TP: RM4.65).

DATA HIGHLIGHTS

Uptrend in palm oil stockpile continues. Palm oil stockpile remained on an uptrend, rising by 10.5% MoM to 2.32m tonnes in Sep-22, as higher output outpaced a 9.3% increase in exports. The stockpile came in higher than Bloomberg median estimate’s 2.26m tonnes, due mainly to lower-than-expected exports.

Output remained on uptrend, but at a slower pace. Palm oil output expanded for the fourth consecutive month, by 2.6% MoM to 1.77m tonnes in Sep-22 (vs. 9.7% MoM change in Aug-22), mainly on the back of seasonal factor. During Sep-22, output contribution from Peninsular Malaysia and East Malaysia grew 0.8% MoM and 4.7% MoM, respectively. YTD, output grew marginally, by 0.3% to 13.34m tonnes, as the 1.7% growth in Peninsular Malaysia’s output was partly weighed down by a -1.4% decline in East Malaysia’s output.

Exports rebounded. Exports rose by 9.3% MoM to 1.42m tonnes in Sep-22, supported mainly by strong export growth in processed palm oil (+28.9% MoM). Geographically, higher exports to China (+108.5%) was partly moderated by lower exports to India (-21.0%), EU (-36.0%) and Pakistan (-38.8%). YTD, exports were relatively flattish (-0.1%) at 11.2m tonnes.

HLIB’s VIEW

Stockpile to remain elevated in Oct-22. Stockpile will likely remain elevated in Oct- 22. While low palm oil prices encourage palm oil consumption, this will likely be offset by Indonesian government’s continuous move to clear its burdensome inventory level.

Forecast. After hitting an all-time-high of RM8,074/tonne in early Mar-22, CPO price has been trending down (and averaging at RM5,442/tonne YTD), on Indonesia’s move to flush out palm oil inventories. We are in the midst of reviewing our 2022-24 CPO price assumptions of RM5,500/4,500/3,800 per tonne (with downward bias), on the back of improving supply prospects, uncertain demand prospects (arising from economic uncertainties), as well as Indonesia’s continuous move to clear its palm oil inventories.

Maintain OVERWEIGHT; integrated players preferred. Despite the downward bias to our CPO price assumptions, we maintain our OVERWEIGHT stance on the sector, supported by commendable valuations (particularly, following recent sharp correction in share prices). For exposure, we prefer integrated players such as KLK (BUY; TP: RM27.27) 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 - 12 Oct 2022