Malaysian Feb 2024 palm oil output was poor despite additional working day from a leap year. Feb 2024 palm oil output of 1.260m MT (-10% MoM, +0.5% YoY) was 6% below of Kenanga and 5% short of consensus’ estimates. Exports were weaker still, disappointing by 10% and 20% against the market and Kenanga, respectively, but closing inventory of 1.919m MT (-5% MoM, -9% YoY) was very much in line (<1%) against both our and market’s estimates due to the weak-than-expected harvest. In view of the inventory tightness, average CPO price for Feb firmed up to RM3,950/MT (+4% MoM, +1% YoY). We continue to expect easier prices after April, due in part to pending South American soyabean harvest but also less intense buying with festivities such as Chinese New Year and Ramadan passing. CPO price of RM3,800/MT for 2024-25 is maintained. Likewise, our NEUTRAL call for the sector stays intact on defensive PBV of 1.2x but limited tailwind to provide any substantial uplift to earnings. Instead, downstream margins are expected to stay weak for another quarter or two, weighing down the profits of larger integrated players’ such as IOI, KLK or SIMEPLNT. As such, we prefer PPB (OP; TP: RM18.50) for its strong agro-based and consumer essential businesses in Malaysia and the region.

2Q edible oil prices hinge on South American soyabean harvest. Current expectation is for Brazil to harvest around 150m MT of soya bean with Argentina harvesting another c.40m MT. Coupled with flattish production outlook for palm oil due to a decline in new planting and falling yields due to ageing trees, 2024 edible oil supply should just about able to meet demand growth with the possibility of a small supply shortfall. Altogether, we expect a manageable but tight edible oil market; hence, CY24-25 CPO prices are expected to trade sideways at around RM3,800/MT. Demand for palm oil is expected to stay robust in Indonesia, the top palm oil producer as well as the largest user, as it priorities domestic availability above exports sale until at least Hari Raya is over, which is in mid-April while India, a big palm oil importer, is likely to maintain generous levels of inventory pending an election in 2Q of this year. Meanwhile, flattish YoY palm oil output is expected despite potentially better harvest from Malaysia even if the improvement is likely to be modest.

Some margin improvements expected, on lower input costs amidst flattish CPO prices. YTD, fertiliser and energy prices in CY24 are now 20%-40% below last year’s level while FFB yield is improving in Malaysia, thanks to returning guest workers. 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 as a modest PKO price up-tick was observed recently. Longer term, demand is expected to improve later in 2024 or early 2025. Higher PKO should over time lift PK prices which in turn will help contain the production cost of CPO further.

Maintain NEUTRAL. The Bursa Plantation Index strengthened 3% QoQ thus far, nudging Kenanga’s plantation sector PBV from 1.1x to 1.2x (and PER from 16x to 17x). Supported by an already low PBV, we have highlighted that the downside to sector equity prices may be quite limited but a strong sector outperformance could be hindered by the lack of a strong upside catalyst. YTD, Bursa Plantation Index recent uptick of 3% is still within the index’s 10-year historical 4% QoQ seasonal swing during Jan-March (i.e. 1Q). Maintain NEUTRAL as the plantation sector can be defensive with gradual increments in price inflation over time as (i) palm oil is largely (70%) for food usage despite a growing biofuel market, (ii) gearing among most planters are manageable with cash generative upstream operations, 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:

PPB (OP; TP: RM18.50) on FY24F earnings recovery on decent associate Wilmar’s earnings but most of all we like the group’s agrobased and consumer essential businesses in Malaysia and the ASEAN region such as flour, feed, basic ready-to-eat products such as bread as well as cinema 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 - 12 Mar 2024