Stay NEUTRAL; Top Picks: Wilmar International, Kuala Lumpur Kepong (KLK), Sarawak Oil Palms (SOP), Ta Ann (TAH), and PP London Sumatra (LSIP). Most speakers at the 33rd Palm & Lauric Oils Price Outlook Conference & Exhibition (POC 2022) spoke about the perfect storm that led prices to where they are now. Most declined to give average price forecasts for the year given the existing volatility. Those that did gave a wide range (MYR4-9k/tonne). We advocate buying Malaysian- centric names and firms with Indonesian downstream exposure.
At POC 2022, most speakers declined to commit on an average price for the year, but all agreed that, in the short term, prices will remain high – driven by the Russia-Ukraine war impact. Volatility and uncertainty were a common feature, with most speakers unable to predict supply and demand projections with much accuracy. Of the 11 speakers, Dorab Mistry and Rasheed Jan Mohammed had a relatively more significant bearish view while Dr James Fry and Togar Sitanggang were more bullish.
The main downside risk to prices that need to be monitored, as highlighted by most speakers, would be the end of the war – this determines the extent of the damage to Black Sea sunseed and soybean crops. Additionally, the impact of demand rationing also needs to be monitored, as inflationary pressures are causing severe woes in India, Pakistan, and China. Most speakers also highlighted the best way to address the current market shortage: Cut biofuel mandates, which releases supply for food demand. Upside risks to prices include a prolonged war, no resolution to Malaysia’s labour shortage issue, further extreme climate conditions, and no changes to biofuel mandates globally.
Maintain sector NEUTRAL. Although we note that our CPO price assumptions of MYR4,300/tonne for 2022 and MYR3,600/tonne for 2023 will likely need to be revised – given the factors we have seen affecting prices like the Russia-Ukraine war and changes in regulations – we prefer to revise this at a later stage, ie once prices are less volatile. Nevertheless, we have updated our sensitivity table and reattached the effective price tables for Malaysia and Indonesia for reference.
Domestic market obligation (DMO) impact. With the just-announced increase in DMO volumes to 30% from 20%, CPO prices spiked up once again yesterday by >MYR600.00/tonne. With this change, companies that would be less affected are those that export products out of Indonesia, eg Wilmar, First Resources (FR), Golden Agri (GGR), Astra Agro Lestari (AALI), Sime Darby Plantation (SDPL), IOI Corp, and KLK. Those more negatively affected are the ones selling their products 100% locally, which include Bumitama Agri, LSIP, and Genting Plantations (GENP).
We continue to advocate buyingMalaysian-centric names and firms with downstream exposure in Indonesia that will be able to benefit from the current tax structures. Our regional Top BUYs KLK, Wilmar, LSIP, SOP, and TAH.
