Palm oil stockpile rose by 3.7% MoM to 2.4m tonnes in Oct-22, as higher output (+8.1%) outpaced a 5.7% increase in exports. Stockpile will likely start trending down from Nov-22 onwards, as output should start easing then (if history is a guide) and CPO’s wide discount against soybean oil will continue to lift palm oil exports. Maintain 2022-24 CPO price assumptions of RM5,050/4,000/3,800 per tonne. We believe CPO price will sustain at above RM4,000/mt over the next few months (possibly until 1Q23), and start trending down from 2Q23 onwards. 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).

DATA HIGHLIGHTS

Uptrend in palm oil stockpile continues. Palm oil stockpile remained on an uptrend, rising by 3.7% MoM to 2.4m tonnes in Oct-22, as higher output outpaced a 5.7% increase in exports. The stockpile came in lower than Bloomberg median estimate’s 2.49m tonnes, due to lower-than-expected output and higher-than-expected exports.

5 th consecutive month increase in output. Output rose for the 5th consecutive month, by 8.1% MoM to 1.9m tonnes in Oct-22, on the back of seasonal factor. During Oct22, output contribution from Peninsular Malaysia and East Malaysia grew 1.8% MoM and 3.2% MoM, respectively. YTD output grew 1.5% to 15.3m tonnes, driven mainly by a 2.2% output growth in Peninsular region (while East Malaysia registered a smaller growth magnitude of 0.6%).

Highest exports since Sep-21. Exports rose by 5.7% MoM to 1.5m tonnes in Oct-22, supported mainly by strong export growth in CPO (+64.6% MoM). Geographically, stronger exports were contributed by China (+35.9%), India (+13.3%), EU (+66.6%), and Pakistan (+125.0%). YTD, exports rose marginally, by 0.6% to 12.7m tonnes.

Exports during the first 10 days of Nov-22. Preliminary data from Amspec indicated that palm oil shipments from Malaysia rose 12.7% MoM to 420.5k tonnes during the first 10 days of Nov-22.

HLIB’s VIEW

Stockpile has peaked. Stockpile will likely start trending down from Nov-22 onwards, as output should start easing from Nov-22 (if history is a guide) and CPO’s wide discount against soybean oil will continue to lift palm oil exports.

Forecast. Maintain 2022-24 CPO price assumptions of RM5,050/4,000/3,800 per tonne. We believe CPO price will sustain at above RM4,000/mt over the next few months (possibly until 1Q23), and start trending down from 2Q23 onwards, 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 built up in key palm oil importing countries.

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 - 11 Nov 2022