May 2023 closing inventory rose to 1.687m MT (+13% MoM, +11% YoY) as output recovered from a weak month in April. Exports also fell, 8% short of our forecast but within consensus’ estimate while CPO price weakened to RM3,796 per MT (-10% MoM, -45% YoY) on more competitive pricing from other edible oils as well as subdued exports to both India and China after they aggressively re-stocked ahead of festivities in 1QCY23. We toned down our CPO price assumption from RM3,800 to RM3,700 per MT during the latest’s results season and are keeping our forecasts at this level for 2023-24. NEUTRAL call is also maintained. Current low PBV ratings indicate that much of the bad news is already priced in, including higher costs and lower CPO prices. Our view of toppish cost has been confirmed but earnings will only benefit later in the year. CPO prices are still soft, hence overall upside catalyst is still weak. We suggest selective accumulation with KLK as our large integrated pick, PPB for growth of its consumer essentials and leisure business in SE Asia while HSPLANT’s dividend yields look sustainable.

Outlook: Softer competing edible oil prices, prospects of biofuel weakness from a slower global economy along with major buyers such as India and China having bought adequate stocks for now are some of the contributors to current palm oil export weakness. However, other traditional palm oil buyers such as Pakistan, the Middle East and Africa are accumulating palm oil. Altogether, improving supply should be absorbed by an equally strong demand pick-up, hence any seasonal inventory build-up (e.g. during peak harvest months) is likely to be temporary. Maintain 2023-24F CPO prices at RM3,700 per MT.

Recommendation: With the arrival of guest workers, Malaysian FFB production is normalising. Easier cost is also in sight and CPO prices should stay range-bound, hence sector earnings should improve in 2HCY23. Meanwhile, current PBV of only 1.1x translates to a rather defensive package amidst an uncertain global economy outlook. With exposure to the growing Asian food market with asset-rich balance sheet and undemanding ratings, we maintain a NEUTRAL call on the sector. KLK (OP, TP: RM24.50) is our integrated pick for its track record, ability to expand beyond Malaysia, and it is still on the acquisition path. Backed by a huge cash surplus, HSPLNT (OP, TP: RM2.30) offers attractive sustainable income yields while PPB (OP, TP: RM19.30)’s regional agri and consumer businesses should see continual earnings recovery.

Source: Kenanga Research - 13 Jun 2023