Malaysia is now in peak FFB production season, hence the strong Sept 2023 palm oil output of 1.829m MT (+4% MoM, +3% YoY), 2% better than Kenanga’s, and 6% above consensus’, estimate. However, export was 10%-11% below our and market’s expectations, moderating MoM further in Sept to a new 10-year low of 1.196m MT (-2% MoM, -16% YoY). End-Sept inventory rose 9% MoM though still not as high as in Sept 2015. Consequently, CPO price softened to RM3,727 (-2% MoM, -0.3% YoY) in Sept but was still range bound as inventory was not excessive (just 1% above consensus estimate) with pending festive demand just ahead. We are keeping our CPO price estimate of RM3,800 per MT for 2023-24. Trading at 1.1x PBV, the sector’s downside looks limited but a strong upside catalyst is missing. The pending El Nino is likely priced in so unless the situation worsens considerably, we are staying NEUTRAL on the sector. KLK (OP, TP RM24.50) is our preferred pick given its good track record, expansion appetite and defensive balance sheet.

Ongoing Latin American soya planting will be key to 2024 supply. A dry summer and late rain are likely to curb US soyabean harvest for this year. 2023 palm oil output is improving but an upcoming El Nino may dampen 2024 palm oil harvest, especially if a “very strong” El Nino develops. Meanwhile, 2023 global edible oil demand growth is ahead of supply and 2024 demand should revert back to the long-term 3%-4% annual YoY increment. Therefore, 2024 supply-demand outlook still look tight unless Latin America’s 1HCY24 soya harvest is bountiful. Altogether, we still expect CPO price to average at RM3,800/MT for 2023 and 2024.

Cost pressure is easing. While YTD average fertiliser price is still high by historical measure, it is nevertheless down by 30% YoY. Likewise, diesel cost has eased YoY. The cost of producing CPO is also offset by the sale of palm kernel (PK), a side product when milling FFB to obtain CPO. While CPO price held firm demand is from more resilient food (70%) and biofuel, PK oil (PKO) prices have fallen as demand of personal care and cosmetic products are more sensitive to economic slowdown. Since mid-2022, PKO prices are no longer trading at 20%-30% above CPO prices but more or less at par. We expect this to normalise in 2024 as inventory adjusts and fresh offtake picks up.

Maintain NEUTRAL. The plantation sector offers defensiveness and value. Palm oil provides long-term exposure into the global food chain and biofuel supply. Estates are also increasingly valuable as land availability for new oil palm development is becoming scarce and land competition with infrastructure and real estate developments is not abating. Though CPO price can be volatile, well managed plantation groups can offer good returns as well as income. We like PPB (OP; TP: RM19.30) for associate (Wilmar) exposure into China and India along with its own growing consumer essential products (flour, feed, bread, canned food) in SE Asia. However, KLK (OP; TP: RM24.50) is our sector pick for the group’s strong track record, hunger to still expand with progressive push towards greater productivity, efficiency and sustainability.

Source: Kenanga Research - 11 Oct 2023