Palm oil stockpile rose 4.4% MoM to 1.83m tonnes in Oct-21 (highest level since Jun-20), on the back of higher output and weaker exports (due to demand destruction from high prices and absence of festive demand, we believe). While the latest set of data is bearish for near-term CPO price sentiment, this will likely be mitigated by seasonally lower palm production cycle. Hence, we believe CPO price will still stay lofty in the near term on the back of (i) near-term supply constraints, and (ii) increasing likelihood of La Nina episode by Nov-21 (which will lend support to vegetable oil prices). Maintain 2021-23 CPO price assumptions of RM4,250/3,500/2,900 per tonne, and Overweight stance on the sector. Top picks are IOI (BUY; TP: RM4.44), KLK (BUY; TP: RM25.33), SDPlant (BUY; TP: RM4.99) and TSH (BUY; TP: RM1.31).

DATA HIGHLIGHTS

Stockpile rises in Oct-21. Palm oil stockpile rose 4.4% MoM to 1.83m tonnes in Oct- 21 (highest level since Jun-20), on the back of higher output and weaker exports. Against Bloomberg consensus, the stockpile came marginally higher than consensus median estimate of 1.82m tonnes.

Higher output from major palm oil producing states pushed output higher. Output rose marginally (by 1.3% MoM) to 1.73m tonnes in Oct-21, driven mainly by higher output in major palm producing states (namely, Johor, Pahang, Sabah and Sarawak).

Cumulatively, output fell 7.9% to 15.03m tonnes during the first 10 months of 2021, dragged mainly by labour shortfall arising from border closure (which in turn was due to Covid-19 pandemic).

Lower exports in Oct-21. Exports fell by 12.0% MoM to 1.42m tonnes in Oct-21, dragged mainly by lower exports to India (-16.8%), EU (-21.9%) and Pakistan (-5.7%), but partly mitigated by China (+4.1%). The weak exports in Oct was due to the absence of major festive season (as we believe the spike in India’s palm oil demand in Sep-21 was due to restocking ahead of Diwali) and demand destruction arising from high prices.

Exports increased for the first 10 days of Nov-21. Exports rose for the first 10 days of Nov-21. Cargo surveyor Amspec indicated that exports rose 8.7% MoM to 500k tonnes during the first 10 days of Nov-21.

HLIB’s VIEW

Forecast. While the latest set of data is bearish for near-term CPO price sentiment, this will likely be mitigated by seasonally lower palm production cycle. Hence, we believe CPO price will still stay lofty in the near term on the back of (i) near-term supply constraints, and (ii) increasing likelihood of La Nina episode by Nov-21 (which will lend support to vegetable oil prices). A more noticeably decline in CPO price will only happen when supplies of vegetable oils (in particular, palm oil and soybean) start showing signs of recovery (possibly by 2Q22). Maintain 2021-23 CPO price assumptions of RM4,250/3,500/2,900 per tonne.

Maintain OVERWEIGHT stance. We maintain our Overweight stance on the sector, underpinned by good near term earnings prospects (arising from high CPO prices) and commendable valuations. Top picks are IOI Corp (BUY; TP: RM4.44), KLK (BUY; TP: RM25.33), Sime Darby Plantation (BUY; TP: RM4.99) and TSH Resources (BUY; TP: RM1.31)

Source: Hong Leong Investment Bank Research - 11 Nov 2021