Inventory Comes In Higher Than Market Expectation

Oct 21 palm oil inventory came in higher than market expectation, mainly dragged by sluggish exports despite production coming in lower than market expectation. We reckon that CPO prices would remain elevated due to the tight supply. Having said that, we expect CPO prices to start to soften in 2Q22 as inventory starts to rebuild because production growth would outpace demand growth in 2022. Maintain UNDERWEIGHT.

WHAT’S NEW

• Inventory came in higher than market expectation. The Malaysian Palm Oil Board (MPOB) reported higher-than-expected inventory of 1.82m tonnes vs the market’s expectation of ~1.78m tonnes as at end-Nov 21. The negative variance was mainly due to palm oil exports coming in lower than market expectations despite crude palm oil (CPO) production coming in lower than expectation as well.

• Losing some market share. As mentioned in our previous note, we reckon that palm oil demand would remain sluggish in 4Q21 as palm oil is losing its price competitiveness to soybean oil (SBO) and sunflower oil (SFO) in China and India respectively. The lower-than-expected exports in Nov 21 were mainly dragged by China and Pakistan, as exports to both countries had dropped by 17% mom and 37% mom respectively. SBO price in China weakened as supply increased in tandem with higher soybean crushing volume, and allowed SBO to recapture the market share that was lost to palm oil in 1H21. Meanwhile, the
Pakistan government recently announced they are currently exploring options to cut expensive palm oil purchases and increase soybean oil and sunflower oil imports after domestic cooking oil prices hit a record high.

ACTION

• Maintain UNDERWEIGHT. We believe CPO prices may sustain at these levels in 1Q22 due to the continued disappointing palm oil production in 2021, as yield recovery from the previous drought is taking longer than expected. However, we maintain UNDERWEIGHT for the sector as: a) the earnings leverage to high CPO prices is likely to be offset by weak production growth and rising cost of production, and b) CPO prices are likely to be weak in 2Q22 as palm oil inventory will be rebuilt and more oilseeds supplies will come into the global market.

• For investors with appetite for good dividend yield, they may consider to HOLD companies with decent dividend yield at about 5-8%, such as Kim Loong Resources (KIML MK), Hap Seng Plantations (HAPL MK), Sarawak Oil Palm (SOP MK), Kuala Lumpur Kepong (KLK MK). • Our top pick for the sector is still HAPL as it gives the highest dividend yield.