• Top Picks: Kuala Lumpur Kepong (KLK), IOI Corp and Wilmar International. We believe medium-term prospects for CPO prices are improving, given the ongoing supply risks and improving demand outlook. In the short term, however, prices could be largely influenced by Indonesia’s export policies and the impact this would have on Malaysian palm oil stocks. Maintain NEUTRAL on sector, with a trading strategy.

• CPO prices have recovered somewhat from the lows, but are still held hostage by Indonesia’s export policies. Although Indonesia’s export ban has been lifted, the market is still being disrupted by its tax levy-free period, given rumours that it could be extended until the year-end (from end- October). Should this occur, Indonesia will continue to offload its stocks at discounted prices, at a detriment to Malaysian exports. As CPO prices react more to Malaysian CPO monthly statistics, this could be a dampener for prices, in our view, should this eventuate.

• Nevertheless, we believe supply risks remain… and this could bolster prices in the medium term: i) Fertiliser availability from Russia and Belarus – which would affect the planting season in South America in November/December; ii) labour shortages in Malaysia – which, if unresolved, could continue to affect crops in 2023; and iii) La Nina – which is expected to last until 1Q23, and could affect vegetable oil supply globally.

• … while demand is returning, especially from price-sensitive countries, given the significant discount CPO is trading at to soybean oil. Palm oil (PO) stock levels at importing countries like China, India, Pakistan, and Bangladesh have picked up from the June/July lows. Discretionary biodiesel demand and increased mandated biodiesel demand could also push up consumption, given the positive PO-gas oil (POGO) spread. If this dynamic remains in place, discretionary biodiesel demand for CPO of 2.5- 3m tonnes could come back to the market, which together with a potential increase in demand from Indonesia’s biodiesel mandate increase to B35/40, may result in 4-5m tonnes of additional CPO demand per year.

• All in, we believe medium-term prospects for CPO prices are improving, given the supply risks and improving demand outlook. In the short term, however, prices could be largely influenced by Indonesia’s export policies and the impact this would have on Malaysian palm oil stocks. We expect stock levels to normalise further after end-October, once the tax- free levy period ends.

• Stay NEUTRAL, with a trading strategy. We expect CPO prices to stabilise at slightly higher levels in 1H23 (once the impact of Malaysia’s labour-affected CPO output is felt on stock levels towards the end of the year), before falling back in 2H23 on the onset of peak output. Our CPO price per tonne assumptions are MYR5,100, MYR3,900, and MYR3,500 for 2022, 2023, and 2024. In terms of earnings growth, regional average earnings growth for 2022F now stands at 36% YoY, but this falls to -20.1% in 2023F. Our Top Picks are the integrated players, ie KLK, IOI and Wilmar. We also have BUY calls for Bumitama Agri and Sarawak Oil Palms.

Source: RHB Research - 21 Oct 2022