• Maintain NEUTRAL, with a tactically positive trading strategy; Top Picks: IOI Corp (IOI), Ta Ann (TAH), Sarawak Oil Palms (SOP). Sector 2Q23 earnings disappointed. Still, 2H23F should improve on better output and lower unit costs. Malaysia’s August palm oil (PO) stocks rose 22.5% MoM to 2.12m tonnes as output lifted 8.9% and exports fell 9.8% MoM. A likely pickup in festive demand in the coming months should be offset by the continued peak season – potentially leading to Malaysian PO stocks staying above the 2m tonne mark till year-end, at least.

• Regional planters’ 2Q23 earnings disappointed – as eight companies reported below expectations results, while five companies were in line and one came in above. The main causes of the disappointment were higher-than-expected unit costs and lower-than-expected output. We make no changes to our CPO price assumptions, which are MYR3,900/tonne, MYR3,900/tonne and MYR3,800/ tonne for 2023, 2024 and 2025.

• Planters looking forward to higher output and lower costs in 2H23... In Malaysia, FFB output for companies under our coverage rose by an average 4.8% QoQ in 2Q23 but fell 5.5% YoY. In Indonesia, 2Q23 FFB output for stocks under our coverage rose 3.3% QoQ but fell 3.8% YoY. Going forward, both Malaysian and Indonesian planters are expecting a strong recovery in output in 2H23 – ranging from a mid-single digit to low double digits, with 1H:2H output in the range of 42-45%:55-58%. Weather is still relatively normal with sufficient rain, and planters are not seeing any signs of El Nino as yet. Planters are also expecting unit costs to moderate slightly in 2H on the back of lower fertiliser prices, although this would be offset slightly by higher fertiliser application as most planters applied less than 50% of their full year requirements in 1H23.

• ...and better volumes for downstream on switching and restocking activities. For planters with downstream operations, we saw lower QoQ margins for most players in both countries. Most planters saw low single digit or negative refining margins during the period due to higher-priced feedstock as well as lower demand. Going forward, planters are hoping for volumes to pick up in 2H23, on restocking and switching activities. CPO is now trading at a significant USD605/tonne discount to soybean oil (SBO), which should make PO products more attractive to buyers.

• Malaysia’s August PO stocks jumped to 2.12m tonnes (+22.5% MoM) as output grew 8.9% MoM and exports fell 9.8% MoM. Stock/usage (S/U) ratio is now at 11%, above the 20-year historical average of 9.7%. Although we see a pickup in demand in the coming months with the festive season, this will be offset with the peak season. As such, we believe PO stocks could stay above the 2m tonne mark potentially until the end of the year, at least.

• Stay NEUTRAL, with a tactical positive trading strategy. We make no changes to our MYR3,900/tonne CPO price assumption for 2023 and 2024. We continue to prefer Malaysian players vs regional players. Top Picks: IOI, SOP and TAH. Regionally, prefer integrated exporters like Wilmar International and Golden Agri.

Source: RHB Securities Research - 12 Sept 2023