• Top Picks are pure planters Ta Ann, Sarawak Oil Palms (SOP), Bumitama Agri (BAL), and PP London Sumatra Indonesia (LSIP). Despite stronger Malaysian palm oil (PO) output in March of +10.6% MoM, PO inventory continued to weaken to 1.72m tonnes (-10.7% MoM) due to a strong 28.6% MoM rise in exports. We expect PO inventory to remain below the 2m tonne mark for the next few months. Key catalyst for the sector would be a strong La Nina in 3Q24. Keep NEUTRAL.

• March production increased 10.6% MoM (+8% YoY), as output picked up post the shorter February month. The MoM output increase came from Peninsular Malaysia and Sabah, which saw +15% and +10.5% MoM growth, but slightly offset by Sarawak at -0.4% MoM. On the other hand, the YoY increase was mainly driven by the spike in Peninsular Malaysia production at +19.1% YoY, followed by Sarawak (+3.5% YoY), but offset by Sabah (-9.3% YoY). While Indonesia has yet to release its January numbers, we expect Indonesia production to be weaker QoQ in 1Q24 due to the post-peak output season on top of the El Nino impact.

• Malaysia exports improved MoM after four consecutive months of decline, rising 28.6% MoM in March (-11.4% YoY), bringing YTD exports to -1.6% YoY. The rebound in exports performance was likely supported by the festive season as well as some restocking activities. As at end-February, China’s and India's stocks were at 15% and 13% below historical levels, while Bangladesh's stock levels were 12% above historical levels.

• Inventory levels continued to decline by 10.7% MoM (+2.4% YoY) to 1.72m tonnes, attributable to higher exports but offset by an incremental jump in production. As a result, stock/usage ratio is still below the historical average of 10%, at 8.85% as at end March.

• Going forward, we expect production to slowly improve in the next few months, with a bigger spike seen from May/June. As for exports, demand could also pick up gradually as restocking activities continue. However, this will remain to be hampered by switching activities, as CPO is still trading at an unusual premium to sunflower oil of USD68/tonne (from USD65/tonne last month) and at a narrower discount of USD133/tonne (from USD172/tonne last month) to soybean oil, making it less attractive to importers.

• Stock levels to remain below the 2m tonne mark in next few months. Even if the export momentum continues, we expect stock levels to remain below the 2m-tonne mark in the next few months as the peak output month is likely to be in 3Q24, barring any unforeseen weather issues.

• Maintain NEUTRAL with a tactically positive trading strategy. We continue to advocate for smaller-cap purer planters to ride the current spike in CPO prices given their higher sensitivity to price movement. Our regional Top Picks remain Ta Ann, SOP, BAL, and LSIP.

Source: RHB Securities Research - 16 Apr 2024