Regional Plantation Companies: Promising start in 2022

  • CPO price had a good start in 2022
  • Heavy rainfall will keep supplies in check
  • Indo’s biodiesel will support demand amid high prices
  • CPO stock valuations are undemanding

Heavy rainfall dampens production. CPO production dropped by 11.3% MoM to 1.45mn MT (up 8.8% YoY), which led to a 12.8% MoM CPO stockpile drop to 1.58mn MT (up 25% YoY). While palm trees are heading to their seasonal low production in 1Q22, the heavy rainfall that triggers floods and logistics congestion is continuing in January, both in Malaysia and Indonesia’s Kalimantan island, which will further dampen production. 

Indonesia’s B30 programme set to support CPO price despite narrowing discount to SBO. CPO is now trading largely at a similar level to soybean oil (SBO). However, the current scarcity and Indonesia’s biodiesel consumption are helping keep the CPO price firm for a while. Indonesia delivered 8.3mn kl of biodiesel in 2021, well above our 6.5mn kl expectation. We forecast Indonesia will continue to deliver 8mn MT of biodiesel in 2022 to support CPO price and demand. 

Sufficient CPO funds to support CPO price in 2022. Indonesia collected IDR69tn (US$4.7bn) in CPO funds last year, which is sufficient to cover the newly announced domestic cooking oil subsidy that amounts to IDR3.6tn, i.e., for 1.2bn litres (IDR3,000/l) in 1H22 on top of the ongoing B30 biodiesel program. The cooking oil subsidy rose since local CPO price is touching IDR14,000/kg, similar level to domestic cooking oil price. 

FR, WIL, and LSIP are our top picks. First Resources (FR) has a good start in 2022 and we believe it could further climb amid favorable CPO price trend. Meanwhile, Wilmar’s (WIL) recent ESG rating upgrade to “A” from “BBB” from MSCI could push positive sentiment on the stocks on top of a positive earnings outlook. Meanwhile, Bumitama (BAL) and London Sumatra (LSIP) remain relatively muted despite the recent CPO price rebound.