Palm oil stockpile shrank by 12.9% MoM to 1.58m tonnes in Dec-21, dragged mainly by lower output (-11.3%). Moving into Jan-22, we believe slower exports to China (arising from seasonal factor) and India (on the back of high prices) will be mitigated by seasonally lower palm production cycle (exacerbated by the onset of La Nina episode). Maintain 2022-23 CPO price assumptions of RM3,500/2,900 per tonne and OVERWEIGHT stance on the sector. Top picks are IOI Corp (BUY; TP: RM4.35), KLK (BUY; TP: RM25.62), Sime Darby Plantation (BUY; TP: RM5.03), and TSH Resources (BUY; TP: RM1.35).

DATA HIGHLIGHTS

Stockpile remained on downtrend. Palm oil stockpile remained on a downtrend (for the second consecutive month), declining by 12.9% MoM to 1.58m tonnes in Dec-21, dragged mainly by lower output (-11.3%), but partly mitigated by a 3.5% decline in exports. The stockpile missed Bloomberg consensus median estimate of 1.7m tonnes, due mainly to lower-than-expected output and mildly higher-than-expected exports.

Lowest output since Mar-21. Output fell 11.3% MoM to 1.45m tonnes in Dec-21, due to seasonal factor and floods in parts of key-growing areas. In 2021, output fell 5.3% to 18.1m tonnes, dragged by labour shortfall arising from border closure (due to Covid-19 pandemic) and floods in parts of key-growing areas in Dec-21.

Exports fell on seasonal factor. Exports fell 3.5% MoM to 1.41m tonnes in Dec-21, dragged mainly by lower exports to China (-27.3%), India (-10.8%) and Pakistan (-8.7%), but was partly mitigated by higher exports to EU (+19.7%). We believe lower exports to key destinations were due mainly to seasonal factor (as winter season typically slows palm oil demand from China) and demand destruction arising from high palm oil price.

Exports for the first 10 days of Jan-22. Preliminary data from independent cargo surveyors (Amspec Agri and Intertek) indicated that palm oil exports fell 41.4-41.6% MoM during the first 10 days of Jan-22.

HLIB’s VIEW

Forecast. Moving into Jan-22, we believe slower exports to China (arising from seasonal factor mentioned as above) and India (on the back of high prices) will be mitigated by seasonally lower palm production cycle (exacerbated by the onset of La Nina episode and labour shortfall). Maintain 2022-23 CPO price assumptions of RM3,500/2,900 per tonne. We believe CPO price will remain elevated in the near term (possibly until 1Q22), supported by (i) La Niña phenomenon, which will likely result in delay in soybean planting in South America and (ii) seasonally lower production cycle (which is expected to last until 1Q22), and this bodes well for near term CPO price. While we still hold the view that CPO price will start trending down from 2Q22 onwards – this hinges on several uncertainties including (i) the entrant of foreign workers into Malaysian shores, which could be delayed, as recent Omicron variant has resulted in the government tightening of existing standard operating procedures (SOPs) on the entry of foreign workers, and (ii) surging fertiliser prices, which may result in planters (in particular smallholders) reducing fertiliser application to oil palms, hence derailing the anticipated yield recovery.

Maintain OVERWEIGHT stance on the sector, underpinned by good near term earnings prospects (arising from high CPO prices) and commendable valuations. Top picks are IOI Corp (BUY; TP: RM4.35), KLK (BUY; TP: RM25.62), Sime Darby Plantation (BUY; TP: RM5.03), and TSH Resources (BUY; TP: RM1.35).

Source: Hong Leong Investment Bank Research - 11 Jan 2022