Malaysia’s palm oil production continued to rise MoM in Aug 2024 but the increase was smaller than usual – as historically, August usually experiences sharp MoM production jump (+9%, 10-year average). After an exceptionally good July harvest, however, a more muted Aug 2024 palm oil output of 1.894m MT (+3% MoM, +8% YoY) was reported, meeting market estimate but slightly (6%) below Kenanga’s expectation. Aug 2024 exports of 1.525m MT and closing inventory of 1.883m MT (+9% MoM, -11% YoY) were also both in line with consensus but lower than Kenanga’s expected Aug CPO price of RM3,911 (-3% Mom, +3% YoY), bringing YTD average to RM3,920, but may see some easing in the coming months as stronger production gathers pace coupled with ongoing US soyabean harvest.
Maintain CPO price of RM3,800/MT for CY24-25 along with our NEUTRAL call. Still trading at PBV of 1.1x, we expect limited downside for sector valuation-wise but see no compelling upside catalysts unless CPO prices start trading 10%-20% higher sustainably, flattish CPO prices are likely to prevail, with upstream costs easing while downstream margins should be stabilising. Planters with growth potential are our preference. These include IOI (OP; TP RM4.20) for downstream turnaround, PPB (OP; TP: RM17.50) for strong regional consumer agri and food exposure, ongoing upstream expansion at TSH (OP; TP RM1.30), and UMCCA (OP; TP: RM6.00) for maturing palms allowing forimproved contributions from maturing Indonesian estates. HSPLANT (OP; RM2.30) is our yield pick.
YTD, CPO prices are slightly firmer than usual. As palm oil production peaks in 3Q along with oilseed harvests in North America and Europe, MPOB CPO price is softest in 3Q, often about 8%-9% weaker QoQ, but came in only 2% lower QoQ for 3QCY24. Nonetheless, 1HCY24 average CPO price reported by planters stood at RM3,865 per MT, in line with our expectation. CPO prices should also stay soft for the rest of 2HCY24.
CY24-25 CPO prices should stay firm. In spite of record Brazilian soyabean season earlier this year, the increase in supply of edible oil is still expected to trail the rise in demand in CY24, on the back of flattish palm oil and rapeseed output. CY24 inventory level is thus set to decline YoY which appears likely to extend into CY25. However, inventory levels are still expected to stay healthy and manageable thus Kenanga is expecting CPO prices to trade sideways around RM3,500 to RM4,000 per MT over CY24-25, averaging RM3,800 per MT.
Upstream margins should continue to do well. 2QCY24 upstream pre-tax margins nudged up by about 300 basis points (bps) to 22% on steady to firmer product prices, lower costs and better harvest. We expect upstream margins to stay healthy in 2HCY24 as higher harvest and lower unit cost help offset seasonally softer palm product prices.
Downstream margins to improve too. Unlike 1QCY24, 2QCY24 saw downstream performances improving by about 150 bps. IOI (OP; TP: RM4.20) and SDG (MP; TP: RM4.20) reported stronger European downstream demand driven by pending introduction of European Union Deforestation Regulation come end-CY24.
Stay NEUTRAL. The global edible supply-demand balance is tightening. Although inventory is still at manageable levels, it does mean the edible oil market has less room to absorb negative supply shocks, be it poor weather, shipping disruptions or rising geopolitical tensions. Thus far, the tightness has yet to translate into higher CPO prices but is supportive of current price levels. Unless trading conditions nudge CPO prices towards the RM4,000 to RM4,500 per MT range, NEUTRAL rating on the sector remains appropriate. We also see limited downside given current undemanding 1.1x PBV and 16x prospective PER. For now, we recommend planters with the ability and/or capability to exhibit grow such as: (a) IOI for downstream turnaround, (b) PPB in the growing regional edible oil and flour markets, (c) TSH’s 25%-30% expansion upstream, and (d) UMCCA’s maturing Indonesian estates driving up profits. For income yields, we suggest HSPLANT.
Source: Kenanga Research - 12 Sept 2024
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SDGCreated by kiasutrader | Nov 22, 2024