The domestic palm oil inventories climbed close to a 10-year high in May 2026 as exports weakened sharply despite lower production, according to Kenanga Research, which maintained its “Overweight” call on the plantation sector amid expectations of firmer crude palm oil (CPO) prices.
Citing data from the Malaysian Palm Oil Board, the research house said Malaysia’s palm oil production fell 7% month-on-month and 14% year-on-year to 1.516 million tonnes in May, below the 10-year average May production level of 1.59 million tonnes.
However, exports declined even more sharply, falling 15% from April and 20% from a year earlier to 1.106 million tonnes, one of the weakest monthly export performances in nearly a decade.
The weaker export demand resulted in end-May inventories rising 5% month-on-month and 22% year-on-year to 2.428 million tonnes, approaching a decade-high level.
Kenanga attributed the export slowdown partly to buyers accelerating purchases from Indonesia ahead of a planned transition to a centralised state-controlled export system expected to be implemented in the second half of 2026.
The brokerage noted that Malaysia’s inventory level was approximately 7% above its forecast, although still broadly in line with market expectations.
Strong Prices Persist Despite Inventory Build-Up
Despite rising stockpiles, palm oil prices remained relatively firm.
Average Malaysian CPO prices eased slightly to RM4,499 per tonne in May from April but remained 16% higher than a year ago.
Kenanga said stronger biodiesel demand following disruptions linked to the Middle East conflict has supported edible oil prices globally.
The research house maintained its average CPO price forecasts of RM4,250 per tonne for 2026 and RM4,200 per tonne for 2027, citing supportive demand fundamentals and growing weather-related supply risks.
El Niño Risk Increasing
A key factor underpinning the positive outlook is the increasing likelihood of a severe El Niño weather event later this year.
According to assessments by the National Oceanic and Atmospheric Administration of the United States, an El Niño event is highly likely during the second half of 2026.
Kenanga highlighted that the probability of a “very strong” El Niño, defined as ocean temperatures exceeding normal levels by more than two degrees Celsius, increased to 33% in May from 25% in April.
Historically, severe El Niño episodes have reduced palm oil production by between 2% and 9% in the following year due to prolonged dry weather affecting oil palm flowering and fruit formation.
Such supply disruptions have previously resulted in CPO price increases of between 5% and 10%.
While the probability remains below 50%, Kenanga said the risks are rising and could provide further support for palm oil prices into 2027.
Upstream Producers Expected to Benefit
The research house believes plantation companies are likely to be net beneficiaries of the current environment despite higher fertiliser and energy costs.
It noted that CPO prices have risen substantially from RM4,019 per tonne in January to RM4,499 per tonne in May, driven by stronger biodiesel demand and concerns over future supply.
Meanwhile, downstream businesses such as oleochemical manufacturers are expected to face continued margin pressure as product prices soften amid uncertain global demand conditions.
Diversification Beyond Plantations
Kenanga also highlighted increasing diversification efforts among major plantation groups.
SD Guthrie Berhad is expanding its industrial property business and expects annual profits of between RM500 million and RM700 million from the segment over 2026 and 2027.
Meanwhile, Kuala Lumpur Kepong Berhad and Genting Plantations Berhad are also growing their property operations, while IOI Corporation Berhad is developing palm wood and empty fruit bunch-to-pulp ventures that are expected to contribute earnings from 2027 onwards.
Preferred Picks
Kenanga maintained its “Overweight” recommendation on the plantation sector, noting that current valuations remain attractive at about 15 times earnings and 1.2 times price-to-book value.
Its top sector picks are:
- IOI Corporation Berhad, with a target price of RM4.55, supported by strong returns on equity and limited earnings exposure to Indonesia.
- Kuala Lumpur Kepong Berhad, with a target price of RM24.50, due to its greater sensitivity to higher CPO prices.
- TSH Resources Berhad, with a target price of RM1.60, as a pure upstream plantation play benefiting directly from stronger palm oil prices.
The research house also sees value in PPB Group Berhad and United Malacca Berhad, citing attractive valuations and improving long-term earnings prospects.
Kenanga concluded that while concerns surrounding Indonesian operations remain a key consideration for some plantation groups, the prospect of sustained high palm oil prices and potential weather-related supply disruptions provide a supportive backdrop for the sector over the coming quarters.
