Kenanga Research & Investment

Plantation - High Inventory on Surprisingly Peakish Output

Publish date: Tue, 13 Sep 2022, 09:12 AM

Overview: Seasonally, Malaysian palm oil output normally rises sharply in July/Aug before peaking in Sept/Oct. In Aug 2022, output grew 10% MoM, an increment stronger than our forecast of 7% and the market’s 8%. However, exports slowed, nudging end-inventory up by 18% MoM. Average CPO price in Aug 2022 was RM4,169/MT (+3% MoM, -8% YoY). We maintain OVERWEIGHT for the sector on forecast CPO prices of RM4,500/RM4,000 per MT for 2022/2023. Recommend KLK and TSH for long term growth, HSPLANT and BPLAN for dividend yields.

Long-term trend: Despite a decent month, Aug 2022 production and exports remained below the 10-year average with end-inventory just within the long-term average. Encouragingly, key buyers are back. MoM, exports to China surged 129% and to EU by 75% (Table 8) while India’s buying slowed only modestly. Indonesia itself resumed road testing of B40 biodiesel in late July after a 5-month delay. As the largest user of palm oil (and palm biodiesel), Indonesia currently runs a B30 blend and plans to adopt the B40 mix this year but now only expected to take place in 2023.

Outlook: Palm oil prices have dipped by >30% since June 2022 but remain relatively firm considering that peak season is here and demand is just picking up. While prices may stay muted for a month or so, record discounts to soya oil prices, pending Deepavali demand from India and rising biodiesel sales are supportive of palm oil prices. Chinese imports, which can be among the biggest, should also improve when the country reverts to a new post-Covid normal. Maintain average CPO price of RM4,500/MT for 2022 and at RM4,000/MT for 2023.

Recommendation: A producer of two day-to-day consumable products (food and fuel) with asset rich NTA and decent valuations, the plantation sector has been holding steadier than the broad market since around June 2022. Maintain OVERWEIGHT in view of the sector’s defensive qualities while global economic outlook remains clouded. Within the sector, we like those offering good dividend yields or the ability to expand upstream where little growth has been seen for the past 3-5 years. We like KLK (OP, TP: RM28.00) and TSH (OP, TP: RM1.80) for upstream growth and HSPLNT (OP, TP: RM2.80) as well as BPLANT (OP, TP: RM0.95) for their attractive dividend yields.

Source: Kenanga Research - 13 Sept 2022

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