We believe CPO price will remain elevated for a while (possibly into end-1H22, if not longer), supported by (i) palm supply disruption in Malaysia, which will likely persist into the next few months, (ii) output uncertainties on major oilseeds arising from Russia-Ukraine conflict and drought in South America; and (iii) Indonesian government’s recent move to raise DMO to 30%, which will further tighten supply of vegetable oil in the exports market. Maintain our 2022-24 CPO price projections of RM4,300/3,300/3,300 per tonne for now given the fluid situation. Every RM100/mt raise in our CPO price projection will lift earnings forecasts for plantation stocks under our coverage by 3.5-15.0%. Maintain OVERWEIGHT, top picks are FGV (BUY; TP: RM2.43); IOI Corp (BUY; TP: RM5.09), KLK (BUY; TP: RM32.43) and SDPlant (BUY; TP: RM5.95).

Elevated CPO price to stay, at least for a while. We believe CPO price will remain at reasonably elevated levels for a while (possibly into end-1H22, if not longer).

Palm oil output disruption in Malaysia to persist into the next few months. Although MPOB projects CPO output in Malaysia to improve by 4.9% to 19m tonnes in 2022, this depends on timely arrival of foreign workers into Malaysian shores, and sufficient fertiliser application (which remains a big question mark, particularly among the smallholders amidst fertiliser shortage).

Output uncertainties on major oilseeds remain. The uncertainties on major oilseeds (such as soybean, corn and sunflower seed) remain, these include (i) the USDA’s recent cuts in its Argentinian and Brazilian soybean output projections on prolonged and severe drought, and (ii) ongoing conflict between Russia and Ukraine has sparked concerns of possible shortage of vegetable oil. According to USDA, Russia and Ukraine collectively account for 78% and 19% of global trade in sunflower oil and corn.

Potential impact on oilseeds aside. The conflict between Russia and Ukraine (if prolongs), will impact supply of fertilisers (hence impacting vegetable oil output), given Russia’s leading position in the world’s supply of fertiliser and related raw materials (such as urea, ammonium nitrate and potash).

Higher DMO quota in Indonesia. The Indonesian government had on 10 Mar 2022 further restrict exports of palm oil products, via the increase in DMO volumes to 30% (from 20% previously). Such move will further exert pressure on the supply of vegetable oil in the export market, which is already facing tight supply situation, hence lending support to CPO price.

Key developments to watch out for includes (i) development on Russia-Ukraine conflicts, (ii) USDA’s planting intentions (which is scheduled to be released on 1 Apr 2022); and (iii) biofuel policies among countries with significant biofuel mandates (such as US and EU).

Forecast. While we believe CPO prices will likely surpass our 2022-24 CPO price projections of RM4,300/3,300/3,300 per tonne, we make no changes on our CPO price projections for now, given the fluid situation. Based on our estimates, every RM100/mt raise in our CPO price projection will lift earnings forecasts for plantation stocks under our coverage by 3.5-15.0%.

Stay OVERWEIGHT. We reiterate our Overweight stance on the sector, underpinned by (i) high near term CPO prices (which will in turn translate to good near term earnings prospects), (ii) easing ESG concerns, and (iii) decent valuations. Top picks remain FGV (BUY; TP: RM2.43); IOI Corp (BUY; TP: RM5.09), KLK (BUY; TP: RM32.43) and Sime Darby Plantation (BUY; TP: RM5.95).

Source: Hong Leong Investment Bank Research - 17 Mar 2022