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. Maintain 2023-24 CPO price assumptions of RM4,000/mt and RM3,800/mt. Maintain Neutral stance on the sector. For exposure, our top picks are IOI (BUY; TP: RM4.16) and KLK (BUY; TP: RM25.19).

2H22 review. CPO spot price recovered from its year-low of RM3,275/mt, boosted by (i) weak near term palm oil output (arising from persistent labour shortage in Malaysia and less favourable weather condition), (ii) palm’s improving price competitiveness against other competing oils and fats (including soybean oil), and (iii) easing palm oil stockpile in Indonesia. While KL Plantation Index recovered by ~8% from its low of 6,348 pts in mid-Oct, it lagged behind the recovery in CPO price (which has recovered by ~20% from its low), due mainly to subdued market sentiment arising from concerns on global economy slowdown.

Near-term CPO price to remain well-supported. CPO price will likely sustain at above RM4,000/mt over the next few months (possibly until 1Q23), supported by (i) lower near term palm supply arising from seasonally low palm oil production cycle and the onset of La Nina, (ii) CPO’s wide discount against soybean oil, which encourage palm oil consumption, (iii) Indonesia’s plan to raise its biofuel mandate (from B30 currently to B35) by 2023, (iv) easing concerns on Malaysia and Indonesia’s palm oil stockpiles, and (v) easing Covid restriction in China.

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. On more positive note, lower palm product prices (arising from weaker demand prospects and better supply outlook) and higher labour cost (arising from higher labour count and shorter working hours) will likely be partly mitigated by lower fertiliser prices (which accounts for ~1/3 of CPO production cost).

Forecast. We Maintain 2023-24 CPO Price Assumptions of RM4,000/mt and RM3,800/mt.

P/E multiple lowered by 1-2x on the absence of earnings growth catalyst. In view of the absence of earnings growth catalyst, we take the opportunity to lower our P/E multiple for plantation companies under our coverage by 1-2x, which led to a 4.6- 18.9% decline in our TPs for plantation companies under our coverage. Post revisions in our TPs, we downgrade our ratings on Genting Plantations and Hap Seng Plantations to HOLD (from Buy earlier). Ratings on other plantation companies, on the other remain unchanged.

Maintain Neutral. We reiterate our Neutral stance on the sector, given the absence of notable earnings growth catalyst. For exposure, we favour integrated players such as KLK (BUY; TP: RM25.19) and IOI (BUY; TP: RM4.16) 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 - 23 Dec 2022