Malaysian palm oil output and exports often begin the calendar year with seasonal softness. 2024 is no different. Jan 2024 palm oil output of 1.402m MT was down by 10% MoM but improved 2% YoY, coming in within 2% of Kenanga’s and 3% of consensus’ estimates. Exports were stronger than expected, up by 1% MoM as well as 19% higher YoY or 9% and 10% above our and market estimates. Therefore, end-Jan inventory dipped to 2.020m MT (-12% MoM, -11% YoY), 3% lower than Kenanga as well as market forecasts. Given average CPO price of RM3,784 (+3% MoM, -4% YoY) in Jan 2024, we are keeping average CPO price of RM3,800 per MT for 2024-25 intact. Maintain NEUTRAL for the sector as 1.2x PBV is supportive against further substantial downside but there is no strong upside lift either. KLK (OP; TP: RM24.50) is our preferred pick given its good track record and expansion potentials in both upstream and downstream beyond Malaysia

Tight edible oil outlook for CY24, with supply matching demand or possibly dipping into a small deficit. Therefore, 2024 is expected to end the year with inventory coming in below the level it started at. All in all, a tight year with 2024-25 CPO prices likely to trade range bound and averaging around RM3,800 per MT. The main issue is demand for edible oil which is underpinned mainly by population and income growth is expected to continue growing at 3%-4% YoY but supply is affected by tightening regulation, unpredictable weather and even geopolitical disruptions. Specifically for palm oil, Indonesia, the top producer and also user, looks set to manage exports till Hari Raya in April while India, a big palm oil importer, is likely to maintain generous levels of inventory pending an election in the first half of this year. Meanwhile, the growth in palm oil supply has moderated on falling yields, largely on ageing trees as well as slower new planting.

Some margin improvement can be expected, on flattish CPO prices coupled with lower input costs. Fertiliser and energy prices are now 30%-40% below last year’s level while FFB yield is improving in Malaysia as the return of guest workers has allowed for more timely harvesting, collection of loose fruit (very oil-rich) and overall better upkeep of the estates. Palm kernel (PK), a by-product of CPO production, has seen soft prices since mid-CY22 as the market for personal care, cosmetics and industrial greases/oils were weak but demand could be stabilising with a modest PK price recovery in late-2024 or 2025 expected. Higher PK prices will translate to lowering the production cost of CPO.

Maintain NEUTRAL. The Bursa plantation sector is trading at PBV of 1.2x, suggesting limited price downside. However, near-term upside catalyst is absent as well. Longer term, the plantation sector can be defensive as (i) palm oil is largely (70%) consumed as food despite growing use as biofuel, (ii) players’ gearings are manageable, ranging from average borrowing levels to surplus cash holdings, and (iii) the value of agriculture land, especially those along the west coast of Peninsular Malaysia, are often significantly higher than their book value.

Within the sector, we prefer growth over income for the next 3-6 months. We like:

KLK (OP; TP: RM24.50) is our preferred pick for the sector largely for its good track record in expanding upstream regionally. In December 2023, KLK acquired substantial stakes (90-92%) in two oil palm estates (7,173 Ha) it was managing for its parent company Batu Kawan. Then in early Feb 2024, KLK bought out the remaining 4.57% equity in IJM Plantations which it does not own. IJM Plantations (now KLK Sawit Nusantara) operates about 62k Ha of planted oil palm area. KLK also offers more value compared to other large market cap integrated peers.

PPB (OP; TP: RM18.40) on FY24F earnings recovery on decent associate Wilmar’s earnings as well as its own businesses in regional flour, feed and film exhibition whilst trading lower than market PER and below book value.

TSH (OP; TP: RM1.30), after having de-geared substantially, TSH is back in expansion mode. It has started development work to plant 8k-10k Ha (20-25% expansion) over the coming 2-3 years. Concurrently, it is also exploring carbon-trading or other carbon related opportunities in the region.

Source: Kenanga Research - 14 Feb 2024