• Top Picks: Ta Ann (TAH), Sarawak Oil Palms (SOP), Golden Agri (GGR), and London Sumatra (LSIP). Sector 3Q23 earnings were in line. 4Q23 earnings should be flattish as productivity moderates, offset by stronger CPO prices. Malaysia’s November palm oil (PO) stocks dipped 1% MoM to 2.42m tonnes, as output and exports declined 8% and 6%. Lower production in the months ahead should be offset by softer demand in the export market, given the high stock levels – potentially leading to Malaysian PO stocks staying above the 2m tonne mark until the year-end, at least.

• The 3Q23 reporting season saw mostly in-line earnings, with six planters booking numbers that were within estimates, three above and three below. We make no changes to our CPO price assumptions for now – MYR3,900, MYR3,900, and MYR3,800 per tonne for 2023, 2024, and 2025.

• Moderation in output anticipated. In Malaysia, output rose 24.8% QoQ or 2.4% YoY in 3Q23 from seasonal factors. For the companies we cover, we saw an average 24.8% QoQ and 4.9% YoY output increase in 3Q23. Most planters expect output to moderate QoQ in 4Q23, albeit not to a significant extent. Going into 2024, despite the ongoing El Nino, companies are still guiding for FFB growth, as the dry weather impact so far has not been substantial. In Indonesia, we saw an average 26.1% QoQ rise and -0.1% YoY output decline for the companies we cover in 3Q23. As usual, the Association of Indonesian Palm Oil Producers’ (GAPKI) official 3Q23 CPO output trends differed, with a -3.5% QoQ decline and +3.3% YoY increase. Although weather in Indonesia has been dry in certain areas like South Sumatra and South Kalimantan, this lasted for c.1.5-2 months only in 3Q23. Going forward, Indonesian planters also expect to see a moderation of output QoQ in 4Q23, but a modest YoY growth in 2024F.

• Hopeful for improved downstream margins in 2024. For planters with downstream operations in Malaysia, margins grew QoQ in 3Q, given the improved competitive advantage against Indonesian players due to the narrowed price spread in Indonesia. Indonesian downstream players’ margins weakened QoQ and YoY in 3Q23, due to the smaller tax differential between upstream and downstream products of USD48/tonne (vs USD63 and USD87 in 2Q23 and 3Q22). Going forward, downstream players are hoping for a better 2024, on higher price volatility and improved demand.

• Malaysia’s November PO stocks fell to 2.42m tonnes (-1.1% MoM) as output and exports fell 8% and 6% MoM. The stock/usage (S/U) ratio is now at 13%, above the 15-year historical average of 10%. Although production is set to taper off in the coming months, weakening export market demand may be likely, given the high stock levels. This could mean PO stocks may still exceed 2m tonnes – potentially until the year-end, at least.

• Maintain sector NEUTRAL with a tactical positive trading strategy, as we continue to expect a higher CPO price environment in 1H24, in anticipation of a weaker El Nino affecting peak output in 2H. We also continue to prefer Malaysian players over regional ones. Malaysia Top Picks are TAH, SOP, IOI Corp and Kuala Lumpur Kepong. Regionally, we like GGR and LSIP.

Source: RHB Securities Research - 13 Dec 2023