The research house in its latest analyst’s report on plantation sector has reiterated its rating of ‘NEUTRAL’ call. Top Picks of this sector are: Sarawak Oil Palms (SOP) and Ta Ann (TAH).
The analyst highlighted the increasing risks of further volatilities in CPO (crude palm oil) prices should the war end or if Indonesia ends the export ban. Hence, a trading strategy for the sector is advocated, in light of the ongoing uncertainties. Winners remain pure Malaysian planters.
What happens when supply headwinds cease? With the latest development in the form of the ban on exports of CPO and its derivatives in Indonesia, supply and demand fundamentals look even tighter in the short term. However, markets are believed to be forward-looking and the problem needs to be addressed now is what happens once the Indonesia export ban is lifted, the Russia-Ukraine war ends, and labour-shortage is resolved in Malaysia? Stock levels in Ukraine and Indonesia will build up, vegetable oil supply will be abundant and vegetable oil prices will decline. The only question is when this will happen.
Additional stock of 2.4m tonnes per month in Indonesia with ban in place. Indonesia produces 3.5-4m tonnes of CPO per month, of which approximately 35% is used domestically. For every month the ban is applicable, there will be an additional 2.4m tonnes of CPO in stock, which is c.48% of the closing stock in the country at end-February of 5m tonnes. Even prior to this export ban, Oil World was already projecting that stock levels in Indonesia will rise 33% YoY in 2022F.
Additional stock of 4.5m tonnes in Ukraine at end of season. As for Ukraine, assuming Oil World forecasts are correct, sunseed stock levels at the end of the 2022 season will also escalate to 4.55m tonnes (from 0.1- 0.2m tonnes in previous years). If the war ends, all this excess stock will also make its way into the market.
Malaysia’s CPO output rose 3.6% MoM in April, while stocks rose 11.5% to 1.64m tonnes, due to a 17.7% MoM drop in exports. Going forward, the research house expects demand for palm oil (PO) from Malaysia to come back in May in light of the current Indonesian export ban, while consumers could also switch back to PO in the short term due to the large USD351.00/tonne discount it is currently trading at vs soyabean oil (SBO).
The assumptions on CPO price are raised to MYR5,300/tonne for 2022 and MYR4,300/tonne for 2023, but the analyst will keep MYR3,500/tonne price assumption for 2024. Given the height of prices currently at above MYR6,000/tonne, the research house believes it may take some time for prices to fall back, and as such, the analyst has raised CPO prices assumptions for 2023.
With the current Indonesia export ban in place, the research house is advocating trading strategy and keeping ‘BUY’ calls on the winners – pure planters in Malaysia such as SOP, TAH. While downstream players in Malaysia with no exposure to Indonesia would also benefit given the lack of competition from Indonesia, and this would include SOP, IOI Corp and Genting Plantations.
Top Picks Target Price
Sarawak Oil Palms (SOP MK) – BUY MYR7.05
Ta Ann Holdings (TAH MK) – BUY MYR6.40
