As fundamentals begin to improve, CPO prices have fallen with a vengeance. Valuations are starting to look attractive but 2H22 could see CPO prices moderate further. Maintain NEUTRAL as we believe a trading strategy is still suitable in this environment, while our Top Picks would be the more integrated players like Kuala Lumpur Kepong (KLK) and Wilmar.
CPO prices have fallen by >30% in the last three weeks, on the back of the lifting of the export ban as well as the issuance of the “flush out” export permits in Indonesia for those seeking an exemption from the Domestic Market Obligation (DMO) requirements. Although we anticipated for prices to fall as quickly as they rose on the back of the lifting of the export ban, the quantum of decline was larger than expected, leading us to believe that speculative activities are also at play.
We are beginning to see a light at the end of the tunnel with regards to supply of vegetable oils. Although the Russia-Ukraine war is still ongoing, we note that there has been some progress with regards to food exports as Russia and Turkey have agreed to pursue talks on a potential safe sea corridor in the Black Sea to export seeds and grain from the Ukraine. In Malaysia, while the labour shortage remains critical, we understand the first batch of Indonesian workers arrived on 22 Jun, with the second batch on 24 Jun. In Indonesia, since the lifting of the export ban and availability of the “flush out” export permits (valid from 8 Jun-31 Jul 2022), the Government has issued permits to export 2.4m tonnes of palm oil products.
CPO now trading at significant discount to SBO and at discount to gasoil. CPO is now trading at a significant discount to soybean oil (SBO) at USD419/tonne. With this, we should see demand coming back from consuming countries in the short term, particularly from price-sensitive countries like China, India, Pakistan and Bangladesh, given the extremely low stock levels currently. In addition, the palm oil-gasoil (POGO) spread has now turned positive – with gasoil now at USD5.30/bbl (USD39/tonne), more expensive than CPO (from -USD36/bbl last month) – making it now financially feasible to produce biodiesel without subsidies.
As such, stock levels should remain tight for the next 2-3 months, possibly until end-3Q, thus supporting CPO prices at current levels. However, as fundamentals improve thereafter – on the assumption that labour shortages are somewhat resolved and the Ukrainian oilseed output is able to be exported out, CPO prices could fall to lower levels of MYR4,000-4,500/tonne for the rest of the year. Our price assumptions of MYR5,300 technically assume a price average of c.MYR4,300 for 2H22, which could be surpassed on the downside, based on the current trajectory.
Maintain NEUTRAL sector call with a trading strategy. While regional planters’ P/E valuation has shrunk to an average 8x 2023F, with the big caps trading in the range of 11-14x, and the regional and mid-caps in the 4- 6x range, we believe there could be more downside in 2H22, as CPO prices moderate further. We are in the midst of reviewing our TPs, as we evaluate the current scenario. Our Top Picks are integrated players – KLK and Wilmar – which are able to withstand the current price pressures better.
