Malaysia: Palm oil to trend upwards in the short term

Analysts expect the current low level of the domestic palm oil stockpile, which is below two million tonnes, will likely position crude palm oil (CPO) prices to stay on an uptrend in the next few months.

Local palm oil stockpiles fell for a fifth month in February to the lowest in 22 months as production declined, outweighing a reduction in exports, said the Malaysian Palm Oil Board (MPOB) on Monday.

UOB Kay Hian (UOBKH) Research said in a report that it anticipates that CPO prices will remain supported at the current level in the short term, driven by the supply tightness in the market.

“However, favourable soybean supply and a shift in demand from palm oil to more attractively priced soybean oil from key markets, alongside the seasonal ramp-up in CPO production, could potentially begin to exert downward pressure on prices in the coming months,” the research house pointed out.

UOBKH Research, which maintained a “market weight” call on the plantation sector said its “buy” recommendations are for Hap Seng Plantations Holdings Bhd and SD Guthrie Bhd.

“We continue to like these companies for their upstream business, favourable production trends, and high dividend yields,” it added.

On the market outlook, UOBKH Research noted production tends to pick up at the beginning of March and ramp up progressively over the next few months.

However, the output for this March may be slightly impacted as it coincides with the Ramadan period.

Exports may pick up in March versus February given increased supply availability as well as consumption demand ahead of the Hari Raya festive period.

“This, however, may be partly offset by palm oil’s prevailing price premiums which are inducing buyers to switch to other vegetable oils,” UOBKH Research said.

Furthermore, the research house also believes inventory may hold around 1.5 million tonnes or increase slightly month-on-month (m-o-m) with the expected rise in production to be absorbed by higher exports m-o-m.

As such, it has maintained its CPO price assumption at RM4,500 per tonne.

Last month, the spot price for CPO averaged RM4,715.80 per tonne, up 22% year-on-year (y-o-y), according to MPOB data, which indicated a lower-than-expected inventory build-up and slower production growth.

“This, combined with tight supply factors from heavy rainfall that caused harvest delays and Indonesia’s ongoing rollout of a biodiesel programme, should continue to provide support for CPO prices in the near term,” said the research house.

Meanwhile, RHB Research said in a note to clients it continues to expect stock levels to remain below two million tonnes for the next few months, on the back of low-output season and upcoming festive season, which is supportive of higher CPO prices.

The research house maintained an “overweight” call on the sector with its top picks being Johor Plantations Group Bhd, Sarawak Oil Palms Bhd, Bumitama Agri Ltd, PT PP London Sumatra Indonesia Tbk and SD Guthrie.

The research house pointed out that the fourth quarter results for plantation companies last year were mostly above estimates.

“We expect this year’s earnings to grow by 12.4% y-o-y on higher average selling prices,” it noted.

RHB Research made no changes to its CPO price assumptions at RM4,300 per tonne for this year and RM4,100 per tonne for next year.

TA Research, meanwhile, has kept a neutral outlook on the sector with an unchanged CPO price forecast of RM3,800 per tonne for this year.

The research house also maintained “sell” calls on SD Guthrie with a target price of RM5.03 and TSH Resources Bhd at RM1.21.

It has “hold” ratings on Kuala Lumpur Kepong Bhd with a target price of RM21.75, IOI Corp Bhd at RM4.17 and FGV Holdings Bhd at RM1.20.

“We continue to recommend ‘buy’ calls for Kim Loong Resources Bhd with a target price of RM2.58 and United Malacca Bhd at RM6.04,” it added.

The key downside risks to its sector outlook are stronger-than-expected demand recovery, lower-than-anticipated palm oil production and significant reductions in production costs.

Tags: consumption, CPO, stockpile, prices, Crude palm oil, Production, palm oil