Malaysia is now in peak FFB production season, hence the strong Sept 2023 palm oil output of 1.829m MT, 2% better than Kenanga’s, and 6% above the consensus, estimate. However, export was 10%-11% below Kenanga’s and the market’s expectations, moderating MoM further in Sept to a new 10-year low.
End-Sept inventory rose 9% MoM though still not as high as in Sept 2015. Consequently, CPO price softened to RM3,727 in Sept but was still range bound as inventory was not excessive with pending festive demand just ahead. The house keeps its CPO price estimate of RM3,800 per MT for 2023−24.
Trading at 1.1x PBV, the sector’s downside looks limited but a strong upside catalyst is missing. The pending El Nino is likely priced in so unless the situation worsens considerably, we are staying NEUTRAL on the sector. KLK is the preferred pick given its good track record, expansion appetite, and defensive balance sheet.
Ongoing Latin American soya planting will be key to 2024 supply. A dry summer and late rain are likely to curb US soybean harvest for this year. 2023 palm oil output is improving but an upcoming El Nino may dampen 2024 palm oil harvest, especially if a “very strong” El Nino develops. Meanwhile, 2023 global edible oil demand growth is ahead of supply and 2024 demand should revert back to the long-term 3%-4% annual YoY increment. Therefore, the 2024 supply-demand outlook still look tight unless Latin America’s 1HCY24 soya harvest is bountiful. Altogether, we still expect CPO price to average at RM3,800/MT for 2023 and 2024.
While YTD average fertiliser price is still high by historical measure, it is nevertheless down by 30% YoY. Likewise, diesel cost has eased YoY. The cost of producing CPO is also offset by the sale of palm kernel (PK), a side product when milling FFB to obtain CPO. While CPO prices held firm demand is from more resilient food (70%) and biofuel, PK oil prices have fallen as the demand for personal care and cosmetic products are more sensitive to the economic slowdown. Since mid-2022, PKO prices are no longer trading at 20%-30% above CPO prices but more or less at par. Kenanga expects this to normalise in 2024 as inventory adjusts and fresh offtake picks up.
Overall the house maintains neutral on the sector. The plantation sector offers defensiveness and value. Palm oil provides long-term exposure to the global food chain and biofuel supply. Estates are also increasingly valuable as land availability for new oil palm development is becoming scarce and land competition with infrastructure and real estate developments is not abating. Though CPO prices can be volatile, well-managed plantation groups can offer good returns as well as income. Kenanga likes PPB (OP; TP: RM19.30) for associate (Wilmar) exposure into China and India along with its own growing consumer essential products (flour, feed, bread, canned food) in SE Asia. However, KLK (OP; TP: RM24.50) is the sector pick for the group’s strong track record, and hunger to expand with a progressive push towards greater productivity, efficiency, and sustainability.
