April 2023 closing inventory fell 9% MoM and 7% YoY despite lower exports as output took an unexpected dip. Production of 1.196m MT in April was 19% below our estimate and 9% under consensus while exports also came in 37% and 13% below respective expectations. CPO price averaged respectably at RM4,218/MT (+1% MoM, -37% YoY) but softened thereafter as forced selling of Brazilian soyabean due to limited storage which is dampening prices. Otherwise, edible oil supply prospects look dimmer than a few months ago due to very poor Argentinean soybean harvest. Maintain forecast CPO price of RM3,800 per MT for 2023 but poor quarterly earnings are still likely due to very strong prices last year. However, low PBV ratings suggest that much of the bad news is already priced-in with cost looking toppish and output to improve. The only missing ingredient is a strong rebound in selling prices; hence, our NEUTRAL view. We recommend to accumulate selectively - KLK as our large integrated pick, TSH offer long-term growth, HSPLANT’s yields look sustainable and PPB for its recovering non-plantation earnings.

Outlook: Healthy palm oil exports are still likely despite April’s weakness. Much of Brazil’s record soybean harvest will probably end up covering for Argentina’s shortfall while the Russia-Ukraine conflict has continued to disrupt sunflower oil supply. Therefore, 2023’s supply recovery hinges mainly on improving rapeseed and palm oil prospects. As supply recovers, edible oil demand is also on the rise, at similar pace. With supply and demand balancing out, any inventory built-up (e.g. during peak harvest months) may not stay high for long. , We are keeping our forecast 2023/24 CPO prices at RM3,800 per MT as inventory is likely to stay fragile.

Recommendation: Stay NEUTRAL as earnings are still bottoming even as the landscape is stabilising with palm oil prices trading range bound, cost inflation beginning to plateau and FFB production is seen inching up moving forward. The sector’s exposure to the growing Asian food (and fuel) market with asset-rich balance sheet and current PBV of only 1.1x translate to a rather defensive package amidst an uncertain global economy. We recommend KLK (OP, TP: RM27.00) as the takeover of IJM Plantations continues to lift earnings via scale and efficiency gains, TSH (OP, TP: RM1.35) which is expanding 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 May 2023