MIDF Picks Ta Ann For Its Pure Upstream CPO Play

Malaysia’s CPO production climbed to 1.8m tonnes (+6.8%yoy, +1.0%ytd) – which nearly match October 2019 levels, banking on higher FFB received by mills at 9.0m tonnes, thanks to the improved tonnage contribution from most of the states.

The local average FFB yield rose by +6.2%yoy to 1.54 tonne/ha, with resilient OER marked at 20.11% on better harvesting activities in the said month. As outlined earlier, performance remained supportive on increased estates activities on combination of more boots on the ground (due to newly hired foreign workers) particularly in peninsular area aided with no strong ElNino appearance.

MIDF says the palm oil exports continues see weaker demand at 1.4m tonnes on high inventories of major importing countries. In fact, China, India, Pakistan, and Bangladesh closing stocks has now reached to pre-pandemic level at 7.4m tonnes, 5.4m tonnes, 3.7m tonnes, and 1.2m tonnes (-21.7%ytd) respectively.

CPO ending stockpiles in Nov-23 continued to be high at 2.4m tonnes largely due to increase in supply dynamics. With abundant stockpiles of PO derivatives such as RBD P. Oil, Olein (+49.4yoy) and Stearin (+4.7yoy), MIDF said this indicates demand for cooking oils, trans-free fats such as margarine, shortening and vegetable ghee or food products particularly were seeing softer demand.

This has been reflected in recent quarter results, where integrated companies like KLK, IOI Corp, and FGVH downstream arm have -1.6% to merely +0.7% profit margin. Softer CPO prices ahead. In Nov-23, the local CPO delivery price ended higher at RM3,718.5/tonne (+4.5%mom), and averaged monthly higher at RM3,700.5/tonne (+1.7%mom, -9.5%yoy, -26.5ytd) dragged by optimism in local production levels. This was in line with estimated November’s price of RM3,702/tonne. Moving forward, the house forecasts that average local CPO delivery prices to close by -0.4%mom lower to RM3,684/tonne in December, as abundant of ending stocks towards end of the year normally would pushing CPO price to downward position.

MIDF maintains NEUTRAL call on the sector with an average CPO price of RM3,800/Mt and RM3,600/Mt for CY23-24. Its new top pick is Ta Ann as it is purely an upstream player, and the share price is highly connected with CPO movement c. 0.82 correlation, hence any upward trajectory in CPO prices (due to the upcoming EL-Nino in 2Q24) would provide trading opportunity in the stock. The house also acknowledged the delayed upcoming El-Nino events (which would constrict the supply side) could be a potential catalyst for the CPO prices to remain elevated for the remainder of the months c. RM3,600-3,900/Mt. However, it said it is also concerned about its downstream product prospects, as high inflationary pressures combined with tight household spending due to high base interest rates locally and worldwide are hindering demand.

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