Palm oil stockpile resumed on downtrend, falling by -6.6% MoM to 2.12m tonnes in Feb-23, due mainly to lower palm output (-9.4%) and imports (-63.8%). We believe stockpile will remain on the downtrend, given: (i) recent excess rainfall (which will likely impact near-term output), and (ii) Indonesia’s restrictive policy, which will likely boost Malaysia’s palm oil exports. Maintain 2023-24 CPO price assumptions of RM4,000/mt and RM3,800/mt, coupled with Neutral rating on the sector (given the absence of notable earnings growth catalyst). For exposure, our top picks are KLK (BUY; TP: RM26.27) and IOI (BUY; TP: RM4.36).

DATA HIGHLIGHTS

Lowest stockpile in 6 months. Palm oil stockpile resumed on downtrend, falling by -6.6% MoM to 2.12m tonnes in Feb-23, due mainly to lower palm output (-9.4%) and imports (-63.8%). The stockpile came in lower than Bloomberg survey’s estimate of 2.23m tonnes, as output missed expectation.

Lowest output since Feb-22. Output declined for the fourth consecutive month, by -9.4% MoM to 1.25m tonnes in Feb-23, due to seasonal factor (shorter month). During Feb-23, output from Peninsular Malaysia region fell by -4.8% MoM, while output from East Malaysia region fell by a bigger margin of -14.1% MoM.

Marginal MoM decline in exports. Exports fell by -2.0% MoM to 1.11m tonnes in Feb- 23, possibly led by lower exports to China (as veg oil inventory in China remained high, and China’s demand for palm oil is seasonally weaker during winter season).

Exports during first 10 days of Mar-23. Cargo surveyors (Intertek and Amspec) indicated that palm oil shipments from Malaysia surged 45.3-52.1% MoM to 474.8- 501.5k tonnes during the first 10 days of Mar-23.

HLIB’s VIEW

Stockpile will likely remain on a downtrend in the near term. We believe stockpile will remain on the downtrend, given: (i) recent excess rainfall (which will likely impact near-term output), and (ii) Indonesia’s restrictive policy, which will likely boost Malaysia’s palm oil exports.

Forecast. Maintain 2023-24 CPO price assumptions of RM4,000/mt and RM3,800/mt, respectively. YTD, CPO price averaged at RM3,990/mt. In our view, CPO price will likely remain well supported at above RM4,000/mt in the near-term, supported by weak near term production outlook (arising from recent heavy rainfall, and Indonesia’s biodiesel mandate and near-term restrictive export policies). For now, we hold the view that CPO price will weaken once Indonesia relaxes on its Domestic Market Obligation (DMO) policy.

Maintain NEUTRAL. We maintain our Neutral stance on the sector, given the absence of notable earnings growth catalyst. For exposure, we still favour integrated players such as KLK (BUY; TP: RM26.27) and IOI (BUY; TP: RM4.36).

Source: Hong Leong Investment Bank Research - 13 Mar 2023