Indonesia Exporters Getting Back Into The Picture
Despite higher palm oil production, palm oil inventory came in lower than expectations
due to higher-than-expected exports. We reckon that the high exports may not recur in
Apr 22 after the removal of Indonesia’s DMO policy. We expect CPO prices to remain
high at RM5,000-6,000/tonne in view of the short-term global vegoil disruption. Maintain
MARKET WEIGHT.
WHAT’S NEW
• Inventory below market expectation. As at end-Mar 22, the Malaysian Palm Oil Board
(MPOB) reported palm oil inventory at 1.47m tonnes, lower than market expectation of
1.49m-1.52m tonnes. The variance was mainly due to the higher-than-expected exports
despite the CPO production coming in higher than market expectations.
• We attribute the higher-than-expected exports to:
a) Malaysia benefitting from Indonesia’s palm oil export disruption. Recall that the
Indonesian government had increased the Domestic Market Obligation (DMO) from 20%
to 30% in early-Mar 22. This had worsened Indonesia’s exports as shipments are being
held while exporters would need to fulfil the sales of 30% of exports volume domestically
before exports licences can be issued. Hence, Malaysia producers benefitted as buyers
turned to Malaysia due to the uncertainty of shipment timings.
b) Higher market share in EU, Central Asia and Middle East. We observed that EU,
Central Asia and Middle East countries had increased their palm oil imports. Some
countries with high usage of sunflower oil increased their palm oil imports by >100% mom
in Mar 22. We reckon that this was due to the absence of sunflower oil supply due to the
Black Sea tensions, which led to these regions switching to palm oil.
• Lower palm oil exports from Apr 22 onwards. Even though we believe the market share
of palm oil will increase in major sunflower oil-importing countries, we expect Malaysia’s palm
oil exports to be lower in Apr 22 as Indonesia will recapture the exports market share for
refined palm products after the removal of DMO on 20 Mar 22. Channel checks reveal that
Indonesia-based exporters are offering more competitive pricing to clear the backlog due the
delays caused by the DMO policy. Based on the Intertek and Amspec surveys, Malaysia
palm oil exports for 1-10 Apr 22 had dropped by 26% mom.
ESSENTIALS
• Higher production in Apr 22 but lower in May 22. Even though palm oil production came in
higher than expectations, palm oil production had increased by 24% mom in Mar 22 in view of
more harvesting days and strong production recovery. We reckon the strong palm oil production
would continue to increase in Apr 22 as the harvesters would usually harvest more before the
Ramadan festive season. However, the oil extraction rate may be lower in Apr 22 because of
the loosened harvesting practises by the harvesters (such as harvesting unripe fruits) before
the long Raya festive season in May 22.
• Impact from rise in minimum wage on Malaysia plantation companies. The Malaysian
government will raise the minimum wage from RM1,200 to RM1,500 with effect from 1 May 22.
We reckon that this is unlikely to have a significant impact on companies’ earnings. Due
to the acute labour shortage over the last two years, plantation companies have made
adjustments to most of their estates workers’ wage to retain them and also to entice the
locals to join as well. Based on our channel checks, the impact on the total cost of production
would be less than 5%, and hence, the impact on earnings would be marginal at less than
3%.
ASSUMPTION CHANGES
• CPO ASP assumptions. We maintain our CPO assumptions at RM4,200/tonne and
RM3,000/tonne for 2022-23 respectively.
• If ASP comes in higher than our current assumptions, Hap Seng Plantations (HAPL
MK/BUY) would benefit the most in terms of earnings upsides among the three big caps,
although Sime Darby Plantations (SDPL MK/HOLD) has the highest earnings sensitivity to
CPO price upside.
• For big caps, we prefer KL Kepong (KLK MK/HOLD) for its higher contribution from
upstream operations, while its production growth would be relatively better compared with the
others, supported by its younger profile plantation in Indonesia.
ACTION
• Maintain MARKET WEIGHT. We believe CPO prices may remain at these levels in 1H22
due to the short-term supply disruption. We maintain MARKET WEIGHT and expect
Malaysian pure upstream players to benefit the most, leveraging on the unprecedentedly high
CPO prices.
• Our top pick would still be Hap Seng Plantation (HAPL MK/BUY/Target: RM3.15), who will
benefit the most as it only sells in the spot market with better CPO ASP as compared with
peers, thanks to their sustainability certifications.
• Among the big-cap plantations in Malaysia, we prefer KL Kepong (KLK) as it is expected
to see stronger production recovery in FY22 by riding on current high prices. Sime Darby
Plantations (SDPL) has the largest CPO volume, so its earnings have the highest leverage
due to rising CPO prices.
SECTOR CATALYSTS
• Lower-than-expected global veg-oil supply due to the impact of La Nina.
• Stronger-than-expected commodity cycle.
• US green diesel demand.