Kenanga Research & Investment

Plantation - Inventory Is Seasonally Peakish

Publish date: Wed, 12 Oct 2022, 12:38 PM

Overview: After a strong Aug production, Malaysia’s Sept palm oil production inched up 3% MoM to 1.770m MT, a tad weaker than our expectation of 1.771m MT but better than the market’s 1.760m MT. Exports improved 9% MoM but ending inventory rose 11% MoM as peak production exceeded exports. Average CPO price for Sept 2022 was RM3,737/MT (-10% MoM, -18% YoY) but is expected to remain firm at RM4,500/4,000 per MT in 2022/23. Maintain OVERWEIGHT for the sector’s strong cash flows and defensiveness. We like KLK and TSH for growth, HSPLANT and BPLAN for dividend yields.

Overview: Like Aug, Sept production and exports were still below the 10-year average. Ending inventory rose above the long-term average but nowhere near the 10-year highs. Importantly, Indonesia is running down palm oil inventory rapidly with record Aug exports and likely in Sept as well. Encouragingly for Malaysia, exports to China, which were subdued till last month, doubled MoM to 264K MT (+109% MoM, +13% YoY) which more than offset the slower sales to India (-26% MoM) and EU (-36% MoM). All in all, exports were healthy despite stiff competition from Indonesia. Biodiesel demand has been trending up as well on robust crude oil prices.

Outlook: Compared to June, the FAO Vegetable Oil Price Index has dipped by nearly 30% while palm oil trended down by nearly 40%. However, oils and fats prices tend to be soft in 3Q on seasonal uptick. With year end festivity, winter and Chinese New Year not too far away, supportive demand should bid well for prices. Demand from China, a big market for edible oils including palm oil, should improve once it reverts to a new post Covid normal. Maintain average CPO price assumptions of RM4,500/MT for 2022 and RM4,000 for 2023.

Recommendation: The KL Plantation Index has been holding better than the broader market since around June 2022 driven by resilient food and fuel demand, asset-rich NTA and undemanding valuations. Stay OVERWEIGHT given the sector’s defensiveness amidst global economic uncertainties. 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. Our pick, KLK (OP, TP: RM28.00) along with TSH (OP, TP: RM1.80) offer better growth prospects while HSPLNT (OP, TP: RM2.80) and BPLANT (OP, TP: RM0.95) have attractive dividend yields.

Source: Kenanga Research - 12 Oct 2022

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