Kenanga Research & Investment

Plantation - Higher-Than-Expected April’s Inventory

Publish date: Mon, 13 May 2024, 11:09 AM

MPOB reported stronger April palm oil output of 1.502m MT (+8% MoM, +26% YoY) which came 3% above Kenanga, but 4% higher than market, expectation. The 26% YoY spike in April’s harvest was due to an unusually weak April last year as a MoM increase in Malaysia’s April palm oil output is more normal. Exports, on the other hand, tend to slow MoM in April after a post-Chinese New Year resurgence in March exports so the 6% MoM dip in April 2024 exports still came in 2% higher than consensus, but nearly 6% weaker than Kenanga’s estimates. End-inventory of 1.744m MT (+2% MoM, +16% YoY) was thus 7% higher than consensus and 8% above our estimates. April average CPO price of RM4,255/MT (+1% MoM, +1% YoY) was firm but flat. However, prices are likely to ease in 2Q as South America soyabean harvest is in full swing and Hari Raya as well as Indian election-related orders had faded. We maintain CPO price of RM3,800/MT for CY24-25 along with our NEUTRAL call. The sector’s 1.2x PBV is defensive but there is no compelling upside catalyst. The smaller, more upstream-centric players should see decent 1Q earnings but weak downstream margins are expected to dampen profitability of larger integrated players such as SIMEPLT, IOI and KLK. We prefer PPB (OP; TP: RM18.50) for its regional agro/consumer exposure, and upstream-centric players with growth potential such as TSH (OP; TP RM1.30) which is expanding its planted area by 20%-25%, and UMCCA (OP; TP: RM6.00) as its Indonesian operation and profitability matures.

Firm CPO prices likely on declining but still manageable edible oil inventory. Owing to its size, Brazil’s soyabean season varies with regions and can be quite long but overall, Mar/Apr to May/June, are key months for South American soyabean harvest. Estimates suggest Argentina should still harvest c.50m MT of soyabean for CY24 but the US Dept. of Agriculture (USDA) has downgraded Brazil’s crop by 3%, from 155m MT to 150m MT as flood have affected Rio Grande do Sul harvest. Companhia Nacional de Abastecimento or CONAB, Brazil’s own agency, had also trimmed expected CY24 soyabean harvest from 149m MT to 146m MT – note that both CONAB and USDA adopt different survey methods, assumptions (eg yields, weather, etc) and even definitions such “inventory” so their estimates do often differ.

Nevertheless, despite the Brazilian downgrade, a record soyabean output is still expected for CY24, which is a relief as overall edible oil demand looks set to exceed supply on flattish palm oil output and only modest increase in rapeseed harvest. As such end-CY24 inventory level is likely to moderate down but staying manageable. Given the fragility of the edible oil supply-demand scenario; CY24- 25 CPO prices are expected to trade sideways, at around RM3,800/MT.

Cost pressures should ease. The fall in fertiliser and energy prices are now more gradual but overall prices are still 15% and 5% lower YoY, respectively, close to CY21 price levels. However, the downtrend in palm kernel (PK) prices since mid-CY22 could be bottoming out. Palm kernel oil (PKO) prices began rising MoM since Dec 2023 and PK prices (the source for PKO) have also started inching up. Higher PK prices help lower CPO cost as proceeds from selling PK is “credited” or offset against CPO extraction cost. Coupled with flattish CPO prices of RM3,800/MT, upstream margins should be better than a year ago.

However, downstream margins might stay soft in 1QCY24, possibly extending into 2QCY24 but headwinds could be abating. Oleochemical restocking momentum appears to remain firm. Since Dec 2023, prices of PKO - a key oleochemical raw material – have been trending up MoM and have recently nudged up PK prices as well.

Maintain NEUTRAL. The Bursa Plantation Index inched up 2% MoM in April but is now diverging from the weakness in CPO prices. Nevertheless, the sector’s valuation is not excessive, trading at 1.2x PBV and 16x prospective PER. However, there is no strong upside catalyst in sight, with firm rather than bullish CPO price expectation. Overall, the plantation sector provides defensive exposure with gradual increments in price inflation over time as: (i) palm oil is largely (70%) used 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 much 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. Although 1QFY24 associate earnings from Wilmar may have disappointed consensus due to weaker commodity trades, we continue to like PPB. Trading below market PER and its own book value, PPB (together with Wilmar) offers good agro-based and consumer essential exposure – from cooking oil, flour, sugar, feed to ready-to-eat products, and cinemas operation – in SE Asia, China and India.

TSH (OP; TP: RM1.30). After de-gearing over FY22-23, TSH is now in expansion mode once more. Work on planting 8k-10k Ha of oil palm (20-25% expansion) has commenced and it is also exploring regional carbon-related opportunities.

UMCCA (OP; TP: RM6.00). Although UMCCA’s Indonesian earnings could still be volatile, its Sumatran estate is maturing; hence forward yields are trending up. Coupled with lower unit cost, the group’s Indonesian earning base looks set to improve moving ahead.

Source: Kenanga Research - 13 May 2024

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