Labour Shortages Still Thwart Palm Oil Harvest, “Neutral” Rating on Plantation Sector: RHB IB

Crude Palm Oil (CPO) prices remain under pressure as stock levels have risen in Malaysia due to Indonesia’s policy reversal. These levels should decrease once Indonesia’s stock levels normalise, and once the disappointing peak output caused by Malaysia’s labour shortage kicks in. The 2Q22 reporting season saw most planters booking results that were in line, after four consecutive quarters of beating forecasts. RHB Research has maintained “NEUTRAL” rating on plantation sector. Meanwhile, the Top Picks of plantation sector are: Kuala Lumpur Kepong, IOI and Wilmar.

In Malaysia, labour shortages continued to hamper harvesting activities. This is expected to continue in 3Q22, since only a trickle of workers have come in so far, with more expected by September/October. Workers from Indonesia are still hard to come by, and some planters have started sourcing from countries like India and Bangladesh instead.

In Indonesia, the research house noticed a mix of output trends from the companies that it covers – those with younger estates posted YoY increases, while those with older estates saw YoY declines in 2Q22. However, output recovered strongly QoQ across the board, averaging +26% for the companies. As usual, the Association of Indonesian Palm Oil Producers’ (GAPKI) official 2Q22 CPO output trends differed – with a 15.5% YoY drop and a 7.6% QoQ decline, bringing 1H22 FFB growth to -4.1% YoY.

Despite the upcoming peak season, planters in Malaysia are now more conservative in guiding for 2H22, given the prevailing labour shortages – with most players expecting flattish-to-slight FFB output growth. Conversely, in Indonesia, most planters are expecting higher output growth in 2H22, on the back of black bunch counts done and the rate of QoQ growth in 2Q22. Indonesian planters now expect FFB output to grow by single digits in FY22, despite the YTD decline seen in 1H22.

Given the recent decline in prices, there is a less aggressive forward-selling stance for 2H22, as planters are nervous about price volatility and the direction of prices. YTD-prices are now at c.MYR5,800 per tonne.

For those with downstream operations in Indonesia, it is expected margins to improve in 2H22, since the Government has extended the tax levy holiday to end-October (from end-August). With this, Malaysian counterparts should see lower downstream margins in 2H22, given the resumption of the competitive advantage Indonesia has with this change.

Malaysia’s palm oil output rose 9.7% MoM in August, while exports fell 1.9%, resulting in inventory rising to 2.09m tonnes (+18.2% MoM). Stock levels in Malaysia could remain high until Indonesia’s tax-free holiday ends (at end-October), which means exports from Malaysia could only improve towards the year-end. This, together with potential disappointments in output in Malaysia due to the prevailing labour shortages, could mean stock levels may only drop towards the year-end.

RHB Research maintains NEUTRAL rating on plantation sector with no change to its MYR5,100/tonne CPO price assumption for 2022. In 2Q22, the research house has downgraded one stock (Astra Agro Lestari) to SELL (from Neutral), while keeping all other recommendations. We now have five BUY, six NEUTRAL, and two SELL calls on the plantation stocks within our coverage.

Top BUYs – Target Price
Kuala Lumpur Kepong (KLK MK) – MYR26.75
IOI Corporation (IOI MK) – MYR4.65
Wilmar (WIL SP) – SGD4.95

Top SELLs – Target Price
FGV (FGV MK) – MYR1.30
Astra Agro Lestari (AALI IJ) – IDR7,240

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