• Maintain OVERWEIGHT; Top Picks: Johor Plantations Group, Sarawak Oil Palms, Bumitama Agri, London Sumatra Indonesia and SD Guthrie. With the recent moderation in CPO prices, the premium between CPO and other vegetable oils is not as significant, while the palm oil gasoil (POGO) spread has also reduced - there is now sufficient funds to subsidise Indonesia's B40 mandate in 2025, even without an increase in export levy. Malaysia's PO stocks remain tight, closing the year at 1.7m tonnes in 2024 (-25% YoY). We may see a further decrease in stocks in the coming months.
• CPO spot prices have moderated from >MYR5,000/tonne last month to MYR4,700-4,800/tonne currently, likely due to the expectation of weaker exports in December due to the uncompetitive prices of CPO vis-a-vis other vegetable oils. CPO was trading at USD156/tonne premium to soybean oil (vs USD114/tonne in Nov 2024) and USD26/tonne premium to sunflower oil in Dec 2024 (vs USD49/tonne discount in Nov 2024), thus resulting in a 10% MoM reduction in Malaysian PO exports in Dec 2024.
• Lower POGO spread = sufficient funds to subsidise Indonesia's B40 mandate. We believe the Government will do what it takes to ensure the B40 mandate is implemented and revising the levy upwards is the easiest option. With the recent moderation of CPO prices, the POGO spread has also narrowed over the last few weeks and is at USD39/bbl now (USD286/tonne), from USD65/bbl (USD322/tonne) in the beginning of Dec 2024. As such, based on the current POGO spread, the biodiesel fund will be sufficient to subsidise the B40 mandate even at the current 7.5% levy rate. Should the levy be raised to 10%, at the current POGO spread, there will even be a surplus of USD1.2bn in the biodiesel fund.
• Inventory levels ended sharply lower in Dec 2024, at 1.71m tonnes (-25% YoY), on higher exports (+11.6% YoY) slightly offset by higher output (+4.2% YoY). End-2024 stock/usage ratio is at 8.5%, which is well below the 15-year historical average of 10%. We continue to expect stock levels to remain below 2m tonnes for the next few months on the back of the low output season and higher demand coming from the upcoming festivities.
• Higher prices could persist in 2025. We make no changes to our CPO price assumptions of MYR4,300/tonne in 2025 and MYR4,100/tonne in 2026. We continue to expect prices to stay higher in 1H25, trading at MYR4,400-4,800/tonne before moderating in 2H25 to MYR4,000-4,400/tonne during the seasonal peak. We believe the culmination of the low output and stock levels in Indonesia in 2024 (YTD-Oct 2024: -7.7% YoY), increasing biodiesel mandates in Indonesia in 2025, and tightening supplies of sunseed and rapeseed & canola in 2025, will lead to a more apparent deficit in global oils and fats in 2025. This will in turn lead to stronger prices for vegetable oil in 2025, with stock/usage ratio for the 17 oils & fats falling to a 15-year low of 12.6% in 2025 (vs the historical average of 13.6%).
• We maintain our OVERWEIGHT call, as we believe higher and stickier prices in 2025 should lead to a sector rerating.

Source: RHB Research - 13 Jan 2025