Beyond the Black Sea
- We raise our FY22 and FY23 Indonesia’s palm oil price forecast to US$850 per MT (net) to account for global supplies hiccup, new export charges
- Vegetable oil supply hiccup is beyond the Black Sea’s sunflower supply bottleneck
- No major supplies seen to disrupt prices
- Maintain BUY for FR, BAL, WIL, and LSIP
Raise CPO price assumptions. We raise our FY22 Indonesia’s average CPO price forecast to US$850 in FY22 and FY23; meanwhile, we raise our long-term CPO price assumption to US$700 per MT. Our CPO price assumption sufficiently anticipated the new export levies and tax for CPO price benchmark above US$1,000 per MT in April 22 onward. Tight soybeans supply outlook on drought season in South America will only help current edible oils high prices to stay for a while, on top of tension in the Blacksea.
High CPO price will last into 2H. We believe high CPO price is not just war related and can sustain into 2H22. A key demand driver is Indonesia’s biodiesel programme, which is expected to absorb 8m MT of CPO this year despite the current high prices. Indonesia has a balance of US$2.5bn in the CPO Fund and a higher Brent crude oil price means a smaller CPO Fund requirement per litre of biodiesel produced.
Moderate output expansion to support CPO price in 2022. We do not see any major output expansion prospects in 2022 and 2023. Palm oil companies guided flat to high single-digit output growth in 2022 and we believe it reflects the plateauing output from Indonesia due to ageing estates and poor maintenance in 2017-2019 amid the low CPO price trend.
First Resources (FR) and Wilmar (WIL) are our top picks for plantation universe. The compelling valuation amid the rising earnings trend means the share price has room to rally further. We raise FR’s and BAL’s TPs to S$2.5 and S$1.0, respectively, while also raising Lonsum (LSIP)’s TP to Rp2,000 per share. We still like Wilmar and maintain our TP of S$6.67, as we believe Wilmar’s consumer expansion is underpriced for now due to concerns about higher raw material cost.