CPO price will likely sustain at above RM4,000/mt over the next few months (possibly until 1Q23), supported by near-term supply concerns and palm’s price competitiveness. We believe CPO price will start trending down from 2Q23, on the back of (i) better supply visibility for vegetable oils (arising from easing labour shortage in Malaysia and absence of weather anomalies), (ii) heightened risk of global recession, and (iii) inventories build up in key palm oil importing countries. CPO price assumptions for 2022-23 are lowered to RM5,050/mt and RM4,000/mt. Earnings forecasts of individual planters (arising from lower CPO price assumptions) will be reviewed in the upcoming results season. We maintain our OVERWEIGHT stance on the sector, supported by commendable valuations. Our top picks are KLK (BUY; TP: RM27.27) and IOI (BUY; TP: RM4.65).

Near-term CPO price to remain well supported at >RM4,000/mt. CPO price will likely sustain at above RM4,000/mt over the next few months (possibly until 1Q23), supported by (i) uncertainties on the fate of Black Sea Grain Corridor (which is set to expire on 19 Nov 2022), (ii) lower near term palm supply arising from seasonally low palm oil production cycle and the onset of La Nina, (iii) favourable POGO spread and CPO’s wide discount against soybean oil, which encourage palm oil consumption, and (iv) easing concerns on Indonesia’s palm oil stockpiles.

CPO price to start trending down from 2Q23. We believe CPO price will start trending down from 2Q23, on the back of (i) better supply visibility for vegetable oils (arising from easing labour shortage in Malaysia and absence of weather anomalies), (ii) heightened risk of global recession, and (iii) inventories build up in key palm oil importing countries.

Labour shortage to ease further in 2023. We note that arrival of foreign workers has started gaining traction in the past few months, and should continue to improve (albeit gradually) into 2023, hence easing worker shortage in the plantation sector.

La Nina is often associated with higher palm oil yields 6-8 months later. Australia Bureau of Meteorology indicated that La Nina will likely end by Feb-23. According to Gro Intelligence, above-normal precipitation (which typically accompanies La Nina climate events) is often associated with higher palm oil yields 6-8 months later – which in turn suggests higher palm oil production from 2Q23 onwards.

Heightened global recession risk. Both IMF and World Bank recently warned that the risk of a global recession has heightened and this will likely drag demand for vegetable oils including palm oil.

Inventories build up in key palm oil importing countries. Low palm oil prices in the past few months have prompted key palm oil importing countries (such as China and India) to step up on their palm oil replenishing activities, resulting in higher edible oil inventory levels, which indicates limited potential for more aggressive replenishing activities for palm oil.

Forecast. We lower our CPO price assumptions for 2022-23 to RM5,050/mt (from RM5,500/mt earlier) and RM4,000/mt (from RM4,500/mt earlier), mainly to reflect (i) weaker CPO price in 3Q22, and (ii) better supply visibility and the absence of demand catalyst. CPO price assumption for 2024, on the other hand, remains unchanged at RM3,800/mt. Earnings forecasts of individual planters (arising from lower CPO price assumptions) will be reviewed in upcoming results season.

Maintain OVERWEIGHT. We maintain our OVERWEIGHT stance on the sector, supported by commendable valuations and high near-term CPO prices. For exposure, our top picks are KLK (BUY; TP: RM27.27) and IOI (BUY; TP: RM4.65).

Source: Hong Leong Investment Bank Research - 10 Nov 2022