• 2024 in Retrospect. CPO prices in 2024 was volatile, with YTD CPO spot price trading as low as RM3,629/MT on 3rd January to a recent high of RM5,327/MT on 5th December. The wide price range brought the YTD average CPO prices (Jan - Nov) to RM4,120/MT (+7% YoY), driven by several factors such as: i) slower-than-expected production growth in Indonesia due to the lagged impact of the 2023 El Niño, ii) lower ending stocks (Nov 2024: 1.84mn tonnes, -24% YoY), and iii) higher total exports (15.6mn tonnes, +13% YoY) supported by strong palm oil demand from key importing countries. We also believe that the recent sharp rise in CPO prices (hit a 2-1/2 year high) was largely due to positive sentiment stemming from current supply tightness and future expectations of increased demand from Indonesia’s B40 biodiesel mandate implementation in 2025.
  
  In tandem with rising CPO prices and lower operation costs (especially fertilizer), saw most companies under our coverage, particularly pure planters (Hap Seng Plantation, TH Plantation, Sarawak Plantation and Sarawak Oil Palm) posted strong earnings growth in their recent 3QCY24 results.

• Modest CPO production in 2025. We expect global production to grow moderately in 2025, primarily supported by a recovery in Indonesia’s production from lower base. This improvement is driven by improving productivity as the lingering effects of El Nino fade and weather conditions normalize. The Indonesian Palm Oil Association (GAPKI) has projected production to rise to 54.5mn MT (+4% YoY) in 2025. Meanwhile, we anticipate Malaysia palm oil production to experience muted growth in 2025, due to ongoing biological tree rest following strong past production and concerns over potential adverse weather conditions (i.e. La Nina).

• Ample Soybean Supplies. The United States Department of Agriculture (USDA) projects global oilseed supply and output to increase moderately in 2024/25 (refer chart 4), driven by impressive global soybean production despite lower projections for rapeseed and sunflower output. Soybean production is expected to rise by 8.2% YoY to 427mn MT for the 2024/25 season, supported by anticipated strong output from major South American producers such as Brazil (+10% YoY), primarily due to more favorable-than-expected weather conditions. Overall, global soybean production, ending stocks, and crush usage are expected to grow by 8.2%, 17.6% and 5% YoY respectively, which we believe signals ample supply in the market. With the major soybean harvesting period occurring in 1H2025 and soybean oil trading at a discount relative to other vegetable oils, this could pose a potential threat to CPO prices, which may trend downward from current elevated levels, particularly starting 2Q25 onwards.

• Demand for CPO Still Steady. We believe demand growth for palm oil will remain steady in 2025, despite the global ample supply of soybean oil. The strong short-term demand for palm oil is likely to be supported by i) restocking activities due to lower edible oil ending stock or inventories among major palm oil importers like India (-11% YoY) and China (-18% YoY), ii) the implementation of Indonesia's B40 biodiesel mandate beginning in 2025, which is expected to increase CPO usage for biodiesel to 14mn MT (+c.20% YoY), and iii) the early festivities of CNY and Ramadhan in 1QCY25. In the long term, we believe demand for palm oil will continue to grow, driven by an expanding global population, rising income levels, and increased demand for palm oil from the growing food industry, particularly in major importing countries.

• 2025 CPO Price Outlook. We foresee that current higher CPO price will continue until 1QCY25, trading within a range of RM400 above and below RM5,000/MT. This is supported by lower output cycle and strong demand ahead of festive seasons (i.e. CNY and Ramadhan). However, we are concerned about CPO price outlook beyond 1QCY25, as we expect prices will begin trading downward due to i) seasonal pick-up in palm oil production starting 2Q, ii) ample global soybean supply, iii) a widening spread of palm oil’s price premium over other edible oils (at the time of writing, soybean oil trading at a significant discount to palm oil of c.USD146.7/MT), iv) widening palm oil-gas oil (POGO) spreads, coupled with cost and technical challenges, could slow down or result in a phased implementation of the biodiesel mandate, and v) strengthening MYR against USD could potentially lower export competitiveness of palm oil. Hence, post 1Q25, we expect CPO price to trend lower, trading within a wider range of RM3,500/MT to RM4,500/MT for the rest of 2025. Overall, our average CPO price forecast for 2025 is RM4,100/MT.
  
  The upside risk to our CPO price forecast are: i) adverse weather condition with prolong heavy rain and flooding potentially disrupting FFB yields and lowering production, ii) higher-than-expected demand and tighter global supply if Indonesia ban export on palm oil for a longer period to prioritize domestic consumption, iii) escalation of geopolitical tensions in Russia-Ukraine and Middle East, and iv) unfavorable government policies and tax structure from importer and exporter countries.

• Higher Earnings Growth Estimate for Upstream Segment. We anticipate that higher CPO realized ASPs, stable production, and lower fertilizer costs will translate into decent earnings growth for most companies under our coverage in 2025, potentially offsetting the impact of the minimum wage hike and additional export duties. The upstream segment is poised for stronger earnings growth, supported by elevated CPO prices in 4QCY24 and into early CY25. We expect this to benefit pure planter companies under coverage, such as Hap Seng, Sarawak Plantation, and TH Plantations. As for the downstream segment, we remain cautious due to intense competition from Indonesia, which benefits from more favorable export duties on their processed products. Additionally, rising PKO and CPO prices could put pressure on refinery and oleochemical margins. However, we expect this segment to recover gradually in 2025, supported by demand growth from easing US and EU interest rates as well as China higher stimulus, although at a slower pace.

• Maintain NEUTRAL on the Plantation Sector. We reiterate our NEUTRAL stance as we believe the elevated CPO prices are unlikely to be sustained over the long term. However, we recommend a short-term trading approach for 1Q25. Our average CPO price target of RM4,100/MT for both 2024 and 2025. We favour pure planters such as Hap Seng Plantations (BUY, TP: RM2.40), and Sarawak Plantation (BUY, TP: RM2.83), given their better earnings growth and margins as the companies’ direct benefit from CPO prices rally as well as attractive dividend yield. Among the big-cap players, we like call on IOI (BUY, TP: RM4.50) due to higher realise ASP among big cap under coverage, improved downstream earnings from specialty fats sub-segments and attractive valuation.

Source: BIMB Securities Research - 2 Jan 2025