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  • Stockpile climbed m-o-m, but CPO price held firm on healthy spread to soybean oil
  • Indonesia domestic prices stayed at Rp12,000/kg at the end of Aug, positive for CPO companies’ 3Q21 earnings performance
  • Valuations are below 5-year average PE
  • 3Q21 earnings growth prospects are not priced in
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Stockpiles on the rise, but huge spread to soybean oil to support CPO prices. Malaysia’s August 2021 CPO stockpile hit 1.87m MT (+10% y-o-y, +25.3% m-o-m), mainly on the back of seasonally high production of 1.7m MT (-8.7% y-o-y, +11.8% m-o-m) amid relatively weak exports. The stockpile expansion is well anticipated due to seasonal factors, and we expect this to continue next month. Despite rising stockpiles, we expect CPO prices to hold firm in view of the large spread to soybean oil and other vegetable oils. 

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Exports continued to decline m-o-m despite strong demand from India. Exports to India climbed by 35% m-o-m to 303k MT, but this was insufficient to offset the downtrend in exports to other countries. Malaysia’s total exports dropped by 17% m-o-m to 1.1m MT (-27% y-o-y). 

Indonesia’s July 21 biodiesel production hit by PPKM. Indonesia’s CPO biodiesel programme production dropped by 25% q-o-q in July and we believe this was primarily driven by the country’s large-scale social-distancing measures or PPKM in July-August 2021. We believe its production to recover on the back of the easing of social-distancing measures in the fourth week of August. 

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3Q21 earnings growth not priced in. CPO planters’ profits rose in 2Q21, except for Lonsum that saw a q-o-q production decline in the Sumatra region. We believe that CPO planters’ earnings could further expand in 3Q21 on the back of the currently firm prices for Indonesia’s domestic CPO market and global markets. CPO planters are currently trading at an FY22F PE of sub-11x (ex. Wilmar 13x), which is considered attractive amid the firm CPO price outlook. We maintain our BUY calls for LSIP, AALI, FR, BAL and WIL. For Wilmar, the prospects of a soybean crushing margin recovery will fuel another leg of earnings growth, coupled with the solid performance of its tropical oil division.