Review of December figures:

December inventory slipped Mom on the back of poor monthly output. Malaysian palm production seasonally peaks in September or more commonly in October. Thereafter monthly output would decline MoM until the following year’s seasonal fruiting uptrend. However, December 2021 production came in a little weaker than usual due probably to a combination of (i) ongoing labour shortfall (ii) heavy rainfall, with several estates in Pahang, Selangor, Terengganu and Kelantan disrupted by floods and (iii) possibly lower fruit yields as indicated by some planters.

After surging exports in November, palm oil exports dipped in December 2021 by -3.5% MoM to 1,415 m MT which is also down by -13.9% YoY. Palm oil’s competitiveness against rivals such as soyabean oil was hampered by elevated prices with CPO-Soy premium shrinking to US$50-100 per MT, a level which typically would start prompting buyers to consider substituting soyabean oil for palm oil instead. However, output fell even faster MoM than the monthly slowdown in exports. Production for the month of December fell -11.3% MoM to 1.451m MT. This in turn pulled down inventory for end December to 1.583m MT (-12.9% MoM).

However, as inventory level was near decade low a year ago, this 2021’s year end inventory was firmer YoY by +25.2% but still hovering at the lower range of inventory levels for the past 5 years. Local demand was healthy, up by 88k MT compared to a month ago as well as up by 103k MT compared to last December. This could be due to an early Chinese New Year, which falls on 1 February in 2022 versus 12 February in 2021. Import in December was up slightly MoM but remain small at 103k MT. Among the larger export destinations, only Egypt saw MoM pick up in exports. All other major export markets, including the three top markets India, China and EU were down MoM. On a full 12-month basis, only India, Turkey and Egypt saw stronger exports YoY. The other larger markets bough less palm oil in the calendar 2021 compared to CY2020.

Our projection for January:

Labour shortfall is to set to continue constraining the sector in 1H CY22. The ongoing spread of the Omicron variant is not helping to accelerate the re-opening of borders either. We are expecting guest workers to only start trickling in after 2Q CY22, probably beyond. As such, we are expecting January 2022 production to just more or less meet exports with imports needed to meet domestic consumption. Some drawdown of December inventory is also anticipated hence end-January 2022 inventory is excected shrink by about -9% MoM.

Our thoughts on the sector:

Palm oil fundamentals over the next month or two suggest little room for bad news. Be it unexpected labour shortages, poor weather or negative news from rival oil and fat complexes. The prevailing key factors remain: (i) speed of foreign workers intake to address labour situation, (ii) Chinese and Indian demand, (iii) ESG developments, and (iv) supply-demand dynamics of other edible oils. Stay NEUTRAL on the plantation sector as supply should progressively ease current tightness in the global oils & fats market. However, we do favour groups that have expanded significantly, providing good growth even if prices softened. KLK (OP, TP RM30.00) is our integrated pick for this reason, strong growth as well as defensive in the event of weaker than expected CPO prices. HSPLANT (OP, TP RM2.30) is our pick for potential dividend surprises. As with all its peers in the sector, HSPLANT should enjoy stronger cashflow from firm CPO price. However, unlike its peers, HSPLANTY has a sizeable cash surplus and this is set to grow further following its proposed divestment of estates to its parent which should conclude in FY22.

Source: Kenanga Research - 11 Jan 2022