No Price Forecast From Forecasters
Forecasters did not provide any price forecast for the first time with so many
uncertainties and political issues overriding the fundamental analysis. Mid-way
through the second day of the conference, the Indonesian government shocked the
market with the increase of DMO from 20% to 30%. CPO prices may rise in the near
term with limited vegoil supply globally, but the current level is pricing in a high risk
premium which may soften towards 2H22. Maintain MARKET WEIGHT.
WHAT’S NEW
• No price forecast. This is the first time some of the key speakers at the Palm & Lauric Oil
Price Outlook Conference (POC) did not gave the average CPO price for the year with too
many uncertainties and political issues involved, which has gone beyond the fundamentals
on supply and demand of vegetable oil (vegoil).
• Market was shocked! The Indonesian government shocked the market with the
announcement that the Domestic Market Obligation (DMO) will increase from 20% to 30%,
effective 10 Mar 22. This had caused a limit up in Malaysian CPO futures during the
afternoon session and 3rd month CPO futures hit high at RM7,268/tonne yesterday. We
reckon this would benefit and continue to boost Malaysian CPO price with more export
control implementation on Indonesian CPO and hence more backlog at the port as exporters
will need to fulfil higher domestic sales in order to get the export license. Malaysian
upstream players will continue to benefit the most by leveraging the high CPO prices, while
we might see some dilutive impact on Indonesian players with relatively lower realised CPO
ASP with approximately 23% of their nucleus CPO sales at Rp9,300/kg.
• Key factors to monitor. With so many uncertainties and changes in the market, speakers
mentioned that we need to closely monitor: a) Russia-Ukraine war, b) sanctions on Russia,
c) next planting season for crops like sunflower, soybean and corn, d) movement of brent
crude oil prices, and e) Indonesian policies on exports levy, biodiesel mandate and DMO.
• Maintain MARKET WEIGHT. With the restrictions on Indonesian palm oil exports, we
expect that Malaysian CPO price may continue to rise in the near term with the limited
supply of vegoil in the world. Malaysian upstream players will benefit the most, especially
those who sell in the spot market. For Indonesian players, we might see some dilutive
impact as the net realised CPO ASP might be lower than the international pricing.
• Our top pick would still be Hap Seng Plantation (HAPL MK/BUY/TP: RM3.15), who will
benefit the most as they only sell in the spot market with better CPO ASP as compared to
peers, thanks to their sustainability certifications.
• Among the big cap plantations in Malaysia, we prefer KLK MK as it is expected to see
stronger production recovery in FY22 by riding on current high prices. SDPL MK has the
largest CPO volume, so its earnings have the highest leverage due to rising CPO prices.
• We have BUY calls on Hap Seng plantation (HAPL MK/BUY/TP:RM3.15), Bumitama Agri
(BAL SP/ BUY/TP:S$0.85), First Resources (FR SP/ BUY/ TP: S$2.10), Triputra Agro (TAP
IJ/ BUY/TP: Rp860)
ESSENTIALS
• Consumer countries are in hand to mouth situation. With the unprecedented high CPO
prices, consumer countries such as China, India and Pakistan are slowing down on their
purchases by: a) buying other alternatives such as soybean oil (which is cheaper than CPO),
and b) releasing reserves (in China). The consumer countries are not willing to take in such
expensive oil with their end consumers having a slowdown in edible oil consumption due to
the high inflation.
• Global vegoil production may improve in 2H22 with new crops in the northern
hemisphere. India had also recently achieved record high mustard production that will
increase from Apr 22, which would bring relief to the vegoil market.
• Urge government to look into the biofuel/biodiesel mandate. The speakers urged the
Indonesian government to consider reducing the usage of vegoil for biofuel/biodiesel
purposes in order to relieve the vegoil supply shortage in the current situation. Indonesia
makes up 25% of global palm oil consumption, while biodiesel contributed about 11% of
global palm oil consumption. With Indonesia being the largest palm oil producer and palm oil
consumer, speakers suggested that the Indonesian government should consider a more
flexible biodiesel programme in order to balance the palm oil demand and supply in the
global market where food vs fuel remains a huge topic to be discussed by stakeholders.
ACTION
• Maintain MARKET WEIGHT. We expect the Malaysian CPO price to continue rising in the
short term due to the sudden change in Indonesia’s DMO policy which we foresee will lead to
some backlog at Indonesia’s ports. The elevated price is likely to stay for longer and higher
than expected. This will continue to drive investors’ appetite towards plantation stocks. Our
BUYs are HAPL ML, BAL SP, FR SP and TAPG IJ.
• The beta. Should the high prices be sustained for longer periods, pure upstream players
would have higher leverage and beta to the CPO uptrend. Among companies under our
coverage, SDPL MK, HAPL MK, TAPG IJ and AALI IJ are those with higher earnings
sensitivity towards CPO prices.
RISKS
• Backlog and cooking oil shortage issues to be resolved in Indonesia. If the backlog
issues in Indonesia’s ports are resolved with exporters getting their export licences after
fulfilling Domestic Market Obligation (DMO), we expect buyers to turn to Indonesia as
Indonesia’s palm oil products are still at a discount to those from Malaysia.
• Increase in US soybean planting area. The USDA expects farmers to plant 88m acres of
soybeans for 2022, up by 0.8m acres from 87.2m acres in 2021. This may result in higherthan-expected soybean production in the market for 2022, and hence, we might see some
price weakness in SBO moving forward.