The Research house has maintained its ‘NEUTRAL’ call on the plantation sector.
While its Top or Preferred Picks of the sector are: Wilmar, Kuala Lumpur Kepong (KLK), Sarawak Oil Palms (SOP), and Ta Ann (TAH). The research house holds the belief in the current uncertain environment, a trading strategy is best for the sector, in light of the volatility in CPO prices. While supply risks are still imminent from the ongoing war, demand risks are also prevalent given the current demand rationing and possibility of biodiesel mandates being cut.
Supply and demand of vegetable oils continue to look tight for 1H2022, thus keeping prices elevated. Nevertheless, it should be noted that stock/usage ratios for the major vegetable oil complexes and CPO are expected to improve in 2022, which imply that CPO prices should moderate in 2H2022.
However, many uncertainties abound. The house prices will moderate if the wild cards below do NOT eventuate:
i. Zero planting and harvesting done in Russia and Ukraine this season. Assuming that there will be some planting, harvesting and exporting of oilseeds and fertiliser in Russia and Ukraine. Already some 803,200 ha in 22 regions have been planted as at 7 Apr, just one week into the planting season. Oil World estimates about 3m tonnes of stock to be stuck in Ukraine this season (vs 0.1-0.2m tonnes in previous years);
ii. Extreme climate conditions recurring in 2022. The assumption of no El Nino/La Nina for the rest of 2022 i made;
iii. Labour shortage in Malaysia not being resolved. Assuming there will be some resolution in 2H2022, as borders have reopened;
iv. Reductions made to Indonesia’s biodiesel mandate. Assuming no changes for the time being.
RHB Research makes no changes to its CPO price assumptions at MYR4,300/tonne for 2022 and MYR3,700/tonne for 2023 for now. While this is considerably lower than current spot prices, they prefer to relook at their price assumptions at a later stage, i.e. once prices are less volatile.
Malaysia’s CPO output rose 24.1% MoM but fell 0.9% YoY in March, with stocks dropping 3.0% to 1.47m tonnes, due to higher exports. They hold the belief that consumers switched back to palm oil in March since CPO moved back to trade at a discount to SBO. However, it should be noted stock levels remained low in consuming countries, significantly below historical averages, due to demand rationing activities.
Hence the research house maintains their ‘NEUTRAL‘ rating and continue to advocate a trading strategy for the sector. Purer Malaysian players as well as those with downstream capacities in Indonesia, who will be able to benefit from the current regulatory structure. Their regional Top BUYs are KLK, Wilmar, SOP and TAH, while we also like LSIP and BAL on valuation grounds.