Highlighted Companies
Hap Seng Plantations ADD, TP RM2.80, RM2.30 close
We like Hap Seng Plantations (HSP) as it trades at an attractive EV/ha of RM38.5k and offers enticing dividend yields of 9%/5% for FY22F/23F.
Kuala Lumpur Kepong ADD, TP RM24.86, RM22.00 close
Kuala Lumpur Kepong’s (KLK) upstream palm oil business earnings in Indonesia will benefit from the current waiver on palm oil export levy. We also like KLK due to potential synergies to be extracted from
its recent acquisitions of IJM Plants.
Stocks could peak only in Oct/Nov 2022F
- Malaysian palm oil stocks rose 18.2% mom to 2.09m tonnes as at end-Aug 2022 due to higher output and imports — higher than our expectations.
- We project palm oil stocks to rise 9.2% mom to 2.29m tonnes by end-Sep 2022F, as rising output trump exports.
- Planters’ earnings likely peaked in 2Q22, as average CPO price in Jul-Aug of RM4,116/tonne are 37% lower vs. 2Q22’s RM6,552/tonne. Sector Neutral.
Malaysia palm oil stocks rose 18% mom to its highest since Nov 19
Malaysia’s palm oil stocks increased 18% mom and 12% yoy to a 33-month high of 2.09m tonnes in Aug 2022, driven by higher output and imports. Stock level was 1.9% above our and 3%/2% above Reuters’/Bloomberg’s poll estimates of 2.06m tonnes and 2.03m/2.05m tonnes, respectively. Aug palm oil stock was above our forecast due mainly to higher-than-expected imports, as Malaysian refiners imported more CPOs from Indonesia due to its attractive pricing against Malaysia’s CPO. We view the rise in palm oil stocks as negative for CPO price in the short term as it suggests ample palm oil supply at producing countries.
Stronger-than-expected imports in Aug was the key surprise
Malaysian palm oil imports rose 11.4% mom and 59% yoy to 145,000 tonnes in Aug. This represents the highest monthly imports since Feb 2022 and could be due to the more attractively priced Indonesia CPO and waiver of export levy by Indonesia since 15 Jul to 31 Oct. Malaysia palm oil exports fell 2% mom but grew 11% yoy to 1.3m tonnes in Aug The weaker mom exports were mainly due to lower exports to the US (-65%) and India (-10%). This was partly due to higher exports from Indonesia following the Indonesia government’s decision to relax its palm oil export policy. Malaysian CPO output rose 10% mom and 1% yoy to 1.73m tonnes in Aug 2022 – in line with our preliminary estimates; this level of CPO output remained at 2.2% below the past 5-year average of 1.76m tonnes for Aug as the labour shortage issue remains unresolved.
Rising stocks trend could stay till Oct/Nov 2022F
We project palm oil stocks to rise 9.2% mom to 2.29m tonnes by end-Sep 2022F, as higher output trump the higher exports. We believe CPO prices could trade in the RM3,500- 4,500/tonne range in Sep 2022F. CPO prices could weaken due to higher Indonesian palm oil exports following the recent extension of the palm oil export levy waiver to 31 Oct, as well as current high palm inventories. However, the downside will be capped by the current CPO wide pricing discount of US$531/tonne against soybean oil as at 8 Sep. The sharp drop in average CPO price in Jul-Aug to RM4,166/tonne (vs. 2Q22’s RM6,552/tonne), coupled with higher operating costs due to the hike in the minimum wage in Malaysia to RM1,500 per month effective 1 May 2022 and higher fertiliser costs, are likely to weaken 3Q22F earnings of upstream planters who sell CPO on spot basis. However, downside could be capped by the industry’s attractive dividend yields of 4-5% and the sector’s undemanding P/Es. Malaysian planters share price upside could be capped by unexciting earnings and ESG concerns.
