Overview: Malaysia’s Nov palm oil output of 1.681m MT is within Kenanga’s expectation of 1.632m MT and market’s 1.720m MT. However, Nov exports of 1.518m MT exceeded our estimate of 1.353m MT but very much within market’s 1.550m MT. Consequently, inventory closed just 4% below consensus estimate but 9% under Kenanga’s. Average CPO price for Nov 2022 was RM4,088/MT (+11% MoM, -23% YoY). For full-year 2022, we continue to expect CPO prices of RM4,500/MT but revised down 2023 assumption from RM4,000/MT to RM3,800/MT. We are also downgrading the sector from OVERWEIGHT to NEUTRAL. The sector’s defensive cash flows and balance sheet especially amidst ongoing uncertain economic outlook remain attractive factors but higher costs are looking sticky and structural. Coupled with easier CPO prices, upside catalyst potential is getting thinner. Our large integrated pick is still KLK; for visible long-term expansion exposure, TSH is our suggestion; while income seekers should consider HSPLANT.

Overview: Malaysia’s Nov inventory ended near a historic average level as aggressive Indonesian selling for the past several months has abated, on normalising inventory levels. Malaysia’s own harvest also weakened as expected while exports momentum to China and India continued to stay healthy. Overall exports were thus a little above the 10-year average while end-inventory was very close to the historical mean.

Outlook: Edible oil prices are consolidating with palm oil prices stay firm as soyabean oil prices eased. Prices should stay healthy, between RM3,500-4,000/MT due to Chinese New Year stocking up followed by recovering demand as the country reverts further to a new post-Covid normal. Maintain average CPO price assumptions of RM4,500/MT for 2022 but tone down 2023 assumption slightly (5%) from RM4,000/MT to RM3,800/MT.

Recommendation: The KL Plantation Index has continued to hold up against the broader market trend, underpinned by resilient food and fuel demand, asset-rich book value and undemanding valuations amidst global economic uncertainties. However, margins are facing pressures from easier palm oil prices compounded by rising cost of labour, fertiliser and transportations. Hence, we downgrade the sector from OVERWEIGHT to NEUTRAL in view of weaker upside potentials ahead. Within the sector, we like those with the ability to expand upstream such as KLK (OP, TP: RM25.50) and TSH (OP, TP: RM1.35) or those with attractive yields such as HSPLNT (OP, TP: RM2.50).

Source: Kenanga Research - 14 Dec 2022