End-March 2023 inventory dipped MoM to 1.673m MT on flat output amid robust exports which exceeded our expectation by 15% and consensus’ by 6%. Monthly production nudged up only 3% MoM, while March export rose 33% MoM to 1.486m MT (+17% YoY). March 2023 average CPO price firmed MoM to RM4,160/MT (+6% MoM, -39% YoY). The sector outlook has brightened over a month ago as poorer Latin American soyabean harvest should lift palm oil exports ahead. Our 2023 forecast CPO price of RM3,800 per MT is maintained but 2024 forecast CPO price was upgraded from RM3,500 to RM3,800 per MT two weeks ago. Cost is also almost bottoming out and the current low PBV rating has imputed in a lot of negatives. However, lacking a strong upside catalyst, we stay NEUTRAL on the sector and stock-selective. KLK is our large integrated pick, TSH for its long-term expansion growth, HSPLANT for income yield and PPB for its recovering non-plantation businesses.

Outlook: Palm oil exports are likely to stay firm for some months to come as the 3rd largest soyabean planter, Argentina, faces very poor harvest, offsetting much of the increment due from Brazil, which is the leading soyabean producer. All in all, edible oil supply should still inch up in 2023 but the now smaller Latin American soyabean harvest coupled with uncertain Russia-Ukraine sunflower supply meant the world would have to rely more on palm oil to address any sizeable demand surge.

Demand is also recovering on inventory replenishment as edible oil prices is now more affordable compared to a year back, post-Covid demand normalization in China and healthy biodiesel demand following OPEC+’s production cuts while Indonesia and Brazil also raised their biodiesel blends recently. Firm average CPO price of RM3,800 per MT is thus expected for 2023-24 but higher production cost remains a concern. Nevertheless, fertiliser prices have eased by about 20% from a year ago (still 60% above 2021 though) and recovering FFB yields may provide some stability in production cost soon.

Recommendation: Maintain NEUTRAL. Quarterly earnings are still bottoming but operating environment is looking more positive than a quarter ago. Cost could also be stabilising and bottoming as FFB productivity inches up and fertiliser prices softened. Prices of palm oil are also expected to stay firm over 2023 and into 2024 supported by healthy demand. Coupled with the sector’s asset-rich balance sheet and just over 1x PBV valuation, the sector looks defensive even amid the current economic uncertainties. Therefore, we recommend companies such as KLK (OP, TP: RM27.00) as streamlining of IJM Plantations’ operations post acquisition is still bearing fruit, TSH (OP, TP: RM1.35) which is set to expand planting by c.30%-50% after de-gearing, HSPLNT (OP, TP: RM2.30) with its huge cash surplus offering attractive sustainable dividend yields, and PPB (OP, TP: RM19.30) which should see its non-plantation earnings recovering.

Source: Kenanga Research - 11 Apr 2023