• Top Picks: Pure planters Ta Ann, Sarawak Oil Palms, Bumitama Agri, and PP London Sumatra Indonesia. Malaysia’s February palm oil (PO) stocks dipped 5.0% MoM to 1.92m tonnes, as output and exports fell 10.2% and 24.8%. There is little sign of festive demand, likely due to continued switching activities (to the cheaper sunflower oil) and running down of inventories. Nevertheless, PO stocks are now looking tighter, and should remain below the 2m-tonne mark next month, thereby providing support to CPO price.

• The 4Q23 reporting season saw earnings that were below expectations. Six planters booked numbers that fell below expectations, two were in line, and four above forecasts. The main reason for the downside surprise was lowerthan-expected FFB production in Indonesia caused by dry weather, which led to higher-than-expected unit costs. We maintain our CPO price assumptions for now – at MYR3,900 and MYR3,800 per tonne for 2024 and 2025.

• In Malaysia, total output rose by 1.6% QoQ or 3.2% YoY in 4Q23. FFB output of the companies under our coverage, however, saw a dip by an average of 0.6% QoQ but a rise by 4.5% YoY in 4Q23. Most planters expect stronger output growth in 2024, as Malaysian estates have not been affected so far by El Nino, with FFB growth expectations at mid-to-high single digits.

• In Indonesia, output fell by 9.2% QoQ but grew 5% YoY for the companies we cover in 4Q23. As usual, the official Association of Indonesian Palm Oil Producers’ (GAPKI) output trends for 4Q differed, showing a 3.6% QoQ rise and a 4.3% YoY decline. We understand weather in Indonesia has been dry in certain areas like South Sumatra and South Kalimantan for a few months. There has also been flooding in other areas, which lasted a few weeks. Given such unpredictable weather conditions, Indonesian planters expect to see flattish-to-moderate output growth of 0-5% in 2024.

• Those with downstream operations saw better margins QoQ in 4Q23, with some returning to the black. Although there was a smaller tax differential between upstream and downstream products of USD35 per tonne in 4Q23 (vs USD48 in 3Q23 and USD39 in 4Q22) in Indonesia, we saw margins recover from their weakest points in 2Q23, as demand improved. Going forward, downstream players hope for a better 2024, as importers run down inventory and feedstock prices see higher price volatility.

• Malaysia’s February PO stocks decreased to 1.92m tonnes (-5.0% MoM) as output and exports fell 10.2% and 24.8% MoM. The stock/usage ratio is now at 9.8%, below the 15-year historical average of 10%. There are not many signs of festive demand, likely due to continued switching activities to cheaper sunflower oil and running down of inventories. Nevertheless, PO stocks are now looking tighter, and should remain below the 2m tonne mark next month – providing continued support to CPO prices.

• Maintain sector NEUTRAL with a tactically positive trading strategy, as we continue to expect a higher CPO price environment in 1H24, in anticipation of a seasonally weaker output and El Nino impact. We continue to prefer upstream players as prime beneficiaries of this strategy.

Source: RHB Securities Research - 12 Mar 2024