• Maintain OVERWEIGHT; Top Picks: Johor Plantations Group, Sarawak Oil Palms, Bumitama Agri, PP London Sumatra Indonesia (LSIP), and SD Guthrie (SDG). The 3Q24 reporting season saw mostly in-line results, with the expectation that 4Q24 would come in stronger on higher ASPs. Palm oil (PO) inventory moderated to 1.84m tonnes in November from lower production, albeit offset by lower exports. We expect PO inventory to end the year below the 2m-tonne mark, as the production peak is over and exports should improve from the upcoming festive season.

• The 3Q24 reporting season saw earnings that were mostly in line. The results of eight planters were in line, two were above and four below estimates. The upside surprises came from FGV (higher FFB output and lower unit costs) and LSIP (lower effective tax rates). Downside surprises came from SDG, TSH Resources, Wilmar and Astra Agro Lestari (on factors like weak FFB output, thin downstream margins and higher tax rates).

• In Malaysia, total output spiked up by 15% QoQ or 7% YoY in 3Q24, bringing 9M24 output growth to 8.7% YoY. The average FFB output of the companies under our coverage also rose 15.4% QoQ, but dropped by 2.1% YoY in 3Q24, leading 9M24 output to increase by3.6% YoY. In Malaysia, production peaked in August and most planters anticipate a QoQ moderation in output in 4Q24, expecting to end the year with output growth in the mid-to high-single digits.

• Indonesia’s output rose by an average 8.8% QoQ but fell 15.8% YoY in 3Q24 for the companies we cover, with 9M24 output down 10% YoY. The weak output in Indonesia was due to the delayed El Nino impact on oil palms. This time around, data from the Association of Indonesian Palm Oil Producers (GAPKI) showed a similar trend, with YTD-August CPO output showing a 4.9% decline YoY. Going forward, Indonesian planters centred around Riau expect production to moderate QoQ in 4Q24, while those with operations around Kalimantan expect outputto peak in 4Q. Overall, most planters expect to end the year with flattish-to-single-digit negative growth in output.

• For those with downstream operations in Malaysia and Indonesia, we saw mostly lower QoQ margin trends – from negative refining margins – while margins from oleochemicals and specialty fats improved QoQ. Downstream players have guided for better margins in 4Q24, as changes in the export tax structure in both countries could lead to better competitiveness for Malaysia, while rising CPO prices could translate to some positive trading margins.

• Inventory levels declined to 1.84m tonnes in November (Oct 2024: 1.89m tonnes), mainly due to lower production (-9.8% MoM), offset by lower exports (-15% MoM). Stock levels are likely to stay below the 2m-tonne mark in 2024, as production continues to moderate and exports gradually improve.

• We maintain our OVERWEIGHT stance on the sector, as we see stronger fundamental prospects in 2025 on tighter global supply, increased biodiesel demand and low stock levels. We also maintain our CPO price assumptions of MYR4,100 and MYR4,300 per tonne for 2024 and 2025. 

Source: RHB Securities Research - 11 Dec 2024