Strong Oct 2023 palm oil output of 1.937m MT (+6% MoM, +7% YoY) was within Kenanga (4%) and consensus (3%) expectations. It also could be the monthly peak output for 2023 or very near so. After Sept decade low exports, exports in Oct improved 21% MoM to 1.466m MT which was in line with our estimate (4%) but 13% above consensus. However, closing inventory continued to inch up to 2.449 MT (+6% MoM, +2% YoY) but still comparable to last Oct level. Average Oct 2024 CPO price softened a little to RM3,640 (-2% MoM, -1% YoY) but with stronger seasonal demand looming ahead, we are maintaining 2023-24 CPO price forecasts at RM3,800 per MT. The supply-demand outlook is expected to stay tight with continual growth in demand likely against an uncertain supply recovery. Trading at 1.1x PBV, the sector’s downside is supported to some extent but with a strong El Nino probably priced in, there is no strong upside catalyst unless El Nino worsens. Maintain NEUTRAL on the sector with KLK (OP, TP RM24.50) as our preferred pick in view of its good track record, expansion appetite and defensive balance sheet.

2024 supply-demand situation looks tight. 2023 palm oil output is improving but 2024 FFB harvest may encounter delays due to rain deficits in Indonesia’s key palm oil producing areas, namely Sumatera and Kalimantan. So far, the rain deficit is not expected to dampen overall harvest much unless El Nino worsens, which is possible but not yet probable. Edible oil demand for 2023 is reverting back to its usual 3%-4% YoY trendline growth. This is likely to persist into 2024 thanks to robust demand for food and biodiesel. Moreover, Indonesia – the largest user of palm oil - is likely to keep inventory levels high as it faces an election later in 2024. Likewise, India – a major palm oil importer – will also be holding a general election in early to mid-2024. As such, 2024 supply-demand trend is expected to stay tight unless Latin America’s soya harvest in Apr/May 2024 is bountiful. Maintain average CPO price forecasts of RM3,800 per MT over 2023 and 2024.

Margins should improve on easier costs. Although still high by historical count, average fertiliser price has fallen by 30% YoY despite a MoM uptick in Oct 2023. Likewise, diesel cost has also eased YoY and FFB harvesting routine is normalising in Malaysia. Demand for PKO (hence PK) should also normalise over 2024 as inventory adjustment bottoms out to trigger fresh buying resumes. CPO cost is affected by palm kernel (PK) sales, a palm oil mill by-product when extracting CPO. While CPO prices have held firmer on steadier food (70%) and biofuel (30%) demand, PKO’s usual 20%-30% price premium to CPO disappeared since mid-2022 as demand for personal care and cosmetic products is more sensitive to economic slowdown.

Maintain NEUTRAL. The plantation sector is defensive and not overly expensive. Palm oil offers good long-term exposure into the global food chain and biofuel supply. Although CPO prices and earnings can be volatile, well managed plantation groups offer good returns as well as growth. Estates are also great store of value as agriculture land for new oil palm development is now scarce and the competition for land from infrastructure and urbanisation is not abating. We like KLK (OP; TP: RM24.50) for the group’s strong track record, expansionary plan and strong balance sheet. PPB (OP; TP: RM19.30) should see earnings recovery in FY24 thanks as to associate’s (Wilmar) exposure into China and India along with its own growing consumer essential products (flour, feed, bread, canned food) in SE Asia

Source: Kenanga Research - 14 Nov 2023