Malaysia: Palm oil stockpile likely to remain low in near term

The outlook for crude palm oil (CPO) has brightened over the past month with a pick up in exports following poorer Latin American soyabean harvest.

Analysts noted that the palm oil stockpile has remained on the downtrend, falling by 21.1% month-on-month to 1.67 million tonnes in March 2023, due mainly to higher exports, which grew close to one-third.

According to Hong Leong Investment Bank (HLIB) Research, the stockpile came in lower than Bloomberg survey’s estimate of 1.75 million tonnes.

“We believe stockpile will remain low in the near term, on the back of seasonally lower production (arising from Ramadan month); and Indonesia’s restrictive export policy and higher biodiesel admixture, which will likely support palm oil shipment from Malaysia,” it said in a report.

However, not unlike other research firms, HLIB Research is “neutral” on the sector, given the absence of notable earnings growth catalyst.

It noted that year-to-date CPO price averaged at RM4,037 per tonne, and believed the CPO price will likely remain well supported at above RM4,000 in the near term.

“For now, we hold the view that CPO price will weaken once Indonesia relaxes its Domestic Market Obligation policy. Maintain 2023-2024 CPO price assumptions of RM4,000 and RM3,800, respectively,” it added.

For exposure to listed stocks, it favours integrated players such as Kuala Lumpur Kepong Bhd (KLK) and IOI Corp Bhd.

Meanwhile, Kenanga Research said companies’ cost is also almost bottoming out and the current low price-to-book (PBV) rating has imputed in a lot of the negative news.

“Quarterly earnings are still bottoming but the operating environment is looking more positive than a quarter ago.

“Cost could also be stabilising and bottoming as fresh fruit bunches (FFB) productivity inches up and fertiliser prices softened,” it said.

It added that prices of palm oil are also expected to stay firm over 2023 and into 2024, supported by healthy demand.

It noted that fertiliser prices have eased by about 20% from a year ago (although they are still 60% above 2021 levels), while recovering FFB yields may provide some stability in production cost soon.

Coupled with the sector’s asset-rich balance sheet and just over one time PBV, it said “the sector looks defensive even amid the current economic uncertainties”.

On stock picks, it recommends companies such as KLK, as the streamlining of IJM Plantations’ operations post-acquisition is still bearing fruit.

The other is TSH Resources Bhd, which is set to expand planting by around 30% to 50% after de-gearing.

Apart from these, Hap Seng Plantations Holdings Bhd offers attractive sustainable dividend yields, backed by a huge cash surplus, while PPB Group Bhd should see its non-plantation earnings recovering, added Kenanga Research.

It said palm oil exports are likely to stay firm for some months to come as Argentina, the third largest soyabean planter, faces very poor harvest.

This will offset much of the increment due from Brazil, which is the leading soyabean producer.

“All in all, edible oil supply should still inch up in 2023 but the now smaller Latin American soyabean harvest, coupled with uncertain Russia-Ukraine sunflower supply, meant the world would have to rely more on palm oil to address any sizeable demand surge,” it added.

Tags: price, estimate, Crude palm oil, Outlook, CPO, stockpile, exports