Nov 2023 palm oil output of 1.789m MT (-8% MoM, +6% YoY) came in within Kenanga (4%) and consensus (2%) expectations. Nov exports were subdued (1.397m MT; -6% MoM, -8% YoY) after a strong showing in Oct, which were within our expectation (2%) but 10% below consensus. Closing inventory thus improved YoY and flattish MoM at 2.420 MT (-1% MoM, +6% YoY), overall slightly (4-5%) lower than ours as well as market expectations. Average CPO price held well at RM3,701 per MT (+2% MoM, -9% YoY) amidst softening soyabean oil prices. We maintain our forecast 2023-24 CPO prices at RM3,800 per MT on a fragile supply-demand outlook. Trading at 1.1x PBV, the downside to the sector appears contained but El Nino has been mild thus far, so there is no strong upside catalyst. Stay NEUTRAL on the sector with KLK (OP; TP: RM24.50) as our preferred pick given its good track record and potential to expand upstream and downstream beyond Malaysia.

Fragile CY24 supply-demand outlook. CY24 edible oil supply is expected to generate a slight surplus but a deficit cannot be dismissed as out of the four main edible oils, only soyabean oil supply is likely to grow substantially in CY24. Supply of palm oil, the most widely used edible oil, is expected to only inch up as new planting has slowed considerably while oil palm trees are also ageing, causing overall sector wide fruit yields to drop. Meanwhile, edible oil demand is normalising back to its 3%-4% YoY trending growth. Indonesia, the biggest palm oil user is set to accommodate higher inventory levels in early CY24 due a pending election. India, another major palm oil buyer, is also holding a general election in CY24. With overall fragile supply-demand prospects, our forecast CPO price of RM3,800 per MT is maintained over CY23-24.

Margins should improve on easier production costs. Although still not cheap, fertiliser prices are now 30%- 40% below a year ago while fuel cost has eased by nearly 40% YoY. FFB harvesting is also normalising in Malaysia, contributing to higher yields, further helping to manage unit production cost down. Palm kernel (PK), a byproduct when milling FFB, is sold to offset 5%-10% of the cost to extract CPO. However, prices have been on the decline since mid-CY22, causing CPO costs to nudge up slightly. The downtrend could now be at or near the bottom and any PK price recovery in CY24 or CY25 should help contain CPO cost further.

Maintain NEUTRAL. Although quarterly CPO prices and earnings can be volatile, the plantation sector can be quite defensive over the longer term. Firstly, palm oil is largely consumed as food even though biofuel use is growing. Secondly, the sector’s gearing is low to decent, with several players even in net cash position. Lastly, the market value of agriculture land, especially those located along the west coast of Peninsular Malaysia are also often significantly higher than book value.

Within the sector, we prefer growth over income for the next 3-6 months. We like:

a) KLK (OP; TP: RM24.50) for its sterling track record expanding upstream regionally and is our pick for the sector. Rating-wise, it also offers better value compared to other larger market cap, integrated players.

b) PPB (OP; TP: RM19.30) as its earnings should recover in FY24 on decent associate Wilmar’s earnings as well as its own regional flour and feed businesses, yet it is trading at decade-low PBV.

c) TSH (OP; TP: RM1.30) which has pared debts aggressively, recapitalised and is now ready to expand by another 30%-40% in new oil palm area over the next few years.

Source: Kenanga Research - 13 Dec 2023