Malaysia’s Aug 2023 palm oil output of 1.753m MT (+1% MoM, -2% YoY) came 1% above Kenanga’s, and 2% higher than consensus’, estimate. MoM palm oil output in Malaysia typically jumps the most during July and Aug, thereafter, monthly production creeps up by another 5%-10% to peak in Sept or Oct but occasionally in Nov (or even Aug itself). However, Aug 2023 export of 1.222m MT was 12% weaker than our expectation and 8% lower than consensus; thus, end-Aug inventory surged 23% MoM. Average CPO price for Aug softened to RM3,805 (-2% MoM, -9% YoY) but is still within our CPO price estimate of RM3,800 per MT for 2023-24. Maintain NEUTRAL sector call. We suspect equity prices have already factored in a “strong” El Nino impact on the sector which now looks likely to occur. Likewise, easier costs in the 2H of 2023 are also largely anticipated with overall ratings not very demanding. PPB is our sector pick.

2024 supply hinges very much on Brazil and Argentina. US-based NOAA (National Oceanic and Atmospheric Administration) is now expecting a “strong” El Nino for Nov 2023 to Feb 2024. The impact on oil palm has been minimal so far but a “very strong” El Nino can disrupt supply in 2024. Meanwhile, upcoming US soyabean harvest is being crimped by dryness even as 2023 edible oil demand stayed buoyant. Therefore, under current “strong” El Nino scenario, global edible oil is already likely to begin 2024 with relatively tight edible oil inventory. Very strong Latin American soya harvest in 1H 2024 may ease the tightness but otherwise, full-year 2024 edible oil supply-demand balance should stay fragile on muted palm, rapeseed and sunflower oil supplies. Relatively firm CPO price of RM3,800/MT is maintained for 2023-24.

Cost pressures should ease. YTD fertiliser prices have come off 40% from peak prices during the 2QCY23 but are still 50% above the 10-year average level, hence not cheap still. Likewise, diesel cost has also eased but higher wages will stay. Palm kernel (PK), a side product from milling FFB to extract CPO, is sold to help offset CPO production cost. Whilst CPO is consumed mainly (70%) as food, PK is used to produce personal care, cosmetics and industrial products which can be more sensitive to economic slowdown. Recent PK oil (PKO) prices seem to reflect this, trading at around CPO prices minus the usual 20−30% premium. This should revert to the norm as PKO inventory adjusts to the new demand but this may take some time, hence the benefit to CPO production cost is more likely in 2024.

Maintain NEUTRAL. Trading at 1.2x PBV, the plantation sector offers deep value ─ from a long-term exposure to robust palm oil demand underpinned by the food and biofuel sectors to increasingly valuable land holding as new regional oil palm development is becoming scarce due to limited land availability, and regulations. While CPO selling prices can be volatile, well managed plantations can offer good returns and cash flow. We like PPB (OP; TP: RM19.30) for its Wilmar’s exposure to China and India along with PPB’s own exposure into SE Asia’s growing consumer essential segment.

Source: Kenanga Research - 12 Sept 2023