We are turning more NEUTRAL
Time to take some profit
We downgrade our sector call to NEUTRAL (from POSITIVE) given limited upside to our TPs following recent share price outperformance. However, a protracted Russian-Ukraine war into the spring planting season and/or any agri-related sanctions on Russia or by Russia may just keep CPO ASP lofty for a bit longer. Else, we believe CPO ASP may likely peak in 1Q22 as PO supply is expected to recover from 2Q22 and Indonesia will gradually lift export restriction post Lebaran. We downgrade GENP, SOP, TSH, and BPLANT to HOLD (from BUY) and cut FR to SELL (from HOLD). We upgrade TAH to BUY (from HOLD). Our BUYs are KLK, TAH and BAL.
1M FCPO price has likely peaked at MYR8,163/t
A confluence of factors formed the perfect storm to lift 1M FCPO to as high as MYR8,163/t on 1 Mar (YTD: MYR5,941/t). These factors included (1) tight CPO supply as output fell short of market expectations in 4Q21 and the industry is now in seasonal low crop season; (2) deteriorated South American crop prospects due to La Nina development last 3 months; (3) spike in crude oil prices due to geopolitical tensions; (4) disrupted sunflower oil exports from the Black sea region due to Russia Ukraine war; (5) high fertilizer prices; and (6) ID’s sudden restriction on PO exports (since 27 Jan) to ensure sufficiency of cooking oil in the domestic market disrupted exports as ID exporters need to show proof they allocated 20% of export volumes to meet domestic market obligation before being granted corresponding export permits.
The perfect storm will soon pass?
Most of the above factors will soon pass. La Nina is forecasted to end over the next three months. Most international climate models surveyed by Australia Bureau of Meteorology expect a return to neutral ENSO condition soon. The world has had two consecutive years of La Nina which impacted oilseed crop prospects that led to tightening supplies. While parts of the world suffered pockets of dryness, La Nina brought ample rainfall to MY and ID. This provided conducive environment for PO crop recovery in 2022. Still, sufficient fertilizer will need to be administered in 1H22 to support optimal output recovery in 2H22. In terms of cropping pattern, we believe PO output is poised to pick up seasonally from 2Q22 and hit a seasonal peak in 2H22. A timely return of foreign labourers to MY, targeted by end-2Q22, will coincide with the onset of peak harvesting season in 2H22. As for ID’s export restrictions, we believe it will ease post Lebaran or even earlier, as long as the government is satisfied there is sufficient domestic cooking oil.
Russian-Ukraine war remains the wild card
A protracted Russian-Ukraine war is our key concern. With each passing day, there is heightened risk of greater sanctions on Russia or by Russians on the rest of the world (in retaliation). Russia and Ukraine account for 75% of global exports of sunflower oils in 2021 marketing year (ie 8.5mt or 8.9% of global 17 oils & fats exports). A prolong war may also risk Ukraine farmers missing out on sunflower planting this late-spring. In addition, Russia is also a key potash and nitrogen fertilizer exporter globally, accounting for more than 12% of global trades (Fig.9). A quick end to Russian-Ukraine war will help restore normalcy again.