• Bullish CPO price trend can sustain in 2022
  • Raise FY22/23F CPO price (net) to US$700 per MT driven by Indonesia’s Biodiesel program
  • Valuations of stocks in this universe are still around their COVID-19 levels
  • We upgrade First Resources (FR) to BUY, our top pick for 2022 beside Bumitama (BAL)

Raise FY22/23 CPO price assumptions. We raise our net CPO price forecast to US$700 per MT for 2022/2023 while keeping our long-term CPO price unchanged at US$687 per MT. Our CPO price assumption is net of export levies and taxes which are expected to remain progressive in the next two years. Firm Brent crude oil price and Indonesia CPO Fund are supportive of palm oil price as it supports biodiesel consumption. Furthermore, we see soybean oil prices remaining firm and allowing CPO to remain at a discount to SBO and help CPO prices hold firm from 2022 onwards.

Positive earnings growth outlook in 2022
 After performed well in 2021, we see companies can sustain the strong earnings trend in 2022. We believe the positive CPO price and better production outlook bodes well for upstream CPO planters’ earnings while for Wilmar, current high commodity prices will benefit its tropical oil refining margin performance, coupled with better soybean crushing margin outlook.

Undemanding valuations amid rising earnings prospects.
 CPO plantation stocks’ valuations is undemanding considering sustaining strong earnings momentum. We also believe investors are underestimating the tight structural supply outlook on limited arable land that will keep palm oil prices firm in 2022-2025.

We like WIL, BAL and LSIP; upgrade FR to BUY. 
We upgrade FR to BUY as its tumbling share price has prompted us to revisit our rating. FR has prime age cycle CPO estates like Bumitama (BAL). We like Wilmar as we believe it will continue to perform well due to its steady margin outlook arising from its well-integrated upstream-downstream platform. We also like London Sumatra (LSIP) for their undemanding valuations amid rising earnings and high palm oil price trend.