Palm oil stockpile fell by 5.0% MoM to 2.29m tonnes in Nov-22, dragged mainly by a 7.3% decline in output, marginally higher exports and domestic disappearance. Stockpile will likely remain on downtrend in the next few months, as seasonally low production cycle has kicked in 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. Following the changes in our earnings forecasts during the recent reporting season (to reflect low er CPO price assumptions), which has in turn led to lower TPs, we downgrade our rating on the sector to NEUTRAL (from Overweight). For exposure, our top picks are KLK (BUY; TP: RM27.11) and IOI (BUY; TP: RM4.36).

DATA HIGHLIGHTS

Stockpile declined for the first time since May-22. Palm oil stockpile fell by 5.0% MoM to 2.29m tonnes in Nov-22, dragged mainly by a 7.3% decline in output, marginally higher exports and domestic disappearance. The stockpile came in lower than the 2.39m tonnes estimated in a Bloomberg survey, due mainly to sharper-than expected fall in output.

Output decline for the first time since May-22. Output fell for the first time since May-22, by 7.3% MoM to 1.68m tonnes in Nov-22, on the back of seasonal factor (as output typically peaks around Sep/Oct). During Nov-22, output contribution from Peninsular Malaysia and East Malaysia fell by 10.0% and 4.2% MoM, respectively. YTD, output grew marginally (by 1.0% YoY) to 16.8m tonnes, driven mainly by a 2.3% output growth in Peninsular region (while output in East Malaysia declined by -0.4%).

Mild increase in exports. Exports increased marginally (by 0.9% MoM) to 1.52m tonnes in Nov-22, driven mainly by higher CPO exports. Note that data on exports to key destinations is no longer available starting from Nov-22.

Exports during the first 10 days of Dec-22. Preliminary data from Intertek indicated that palm oil shipments from Malaysia increased by 5.5% MoM to 492.9k tonnes during the first 10 days of Dec-22.

HLIB’s VIEW

Stockpile will likely remain on downtrend in the near term. Stockpile will likely remain on downtrend in the next few months, as seasonally low production cycle has kicked in and CPO’s wide discount against soybean oil (~US$600/tonne at the time of writing) 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.

Downgrade to NEUTRAL. Following the changes in our earnings forecasts during the recent reporting season (to reflect lower CPO price assumptions), which has in turn led to lower TPs, we downgrade our rating on the sector to NEUTRAL (from Overweight). For exposure, our top picks are KLK (BUY; TP: RM27.11) and IOI (BUY; TP: RM4.36).

Source: Hong Leong Investment Bank Research - 14 Dec 2022