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Kuala Lumpur Kepong ADD, TP RM24.86, RM20.70 close
Kuala Lumpur Kepong’s (KLK) upstream palm oil business in Indonesia will benefit from Indonesia’s plans to potentially extend the waiver of export levy till endDec 2022. The key catalyst for the stock is the potential synergies from the integration of the estates it recently acquired.
Stock preview and reasons for weaker price
- Malaysia’s palm oil stock likely rose by 10% mom to 2.3m tonnes as at endSep 2022F, due mainly to higher output.
- Indonesia’s palm oil export tax is more competitive vs. Malaysia’s in Oct.
- CPO prices fell recently due to rising export sales from Indonesia and competition from Argentina’s soybean oil. Reiterate Neutral sector rating.
Palm oil inventory likely grew by 10% mom in Sep 2022
Findings from a survey of planters by the CGS-CIMB Futures team revealed that Malaysia’s CPO output likely grew by 3% mom and 4% yoy to 1.78m tonnes in Sep 2022. Sep/Oct have historically been the peak production months for Malaysian palm oil. Meanwhile, palm oil exports likely grew by 9.4% mom, but fell 11% yoy, to 1.42m tonnes in Sep, based on export statistics by cargo surveyors Intertek (+9.7% mom), SGS (+6.9%) and Amspec Malaysia (+10.8% mom). The stronger mom palm oil exports from Malaysia could be due to CPO’s more attractive price vs. soybean oil’s. We estimate Malaysia’s palm oil inventory probably grew by 10.4% mom and 32.4% yoy to 2.3m tonnes at end-Sep 2022, its highest level since Oct 2019, due to higher output. Our estimate of 2.3m tonnes for Sep 2022F palm oil stock level in Malaysia is 9.5% above the 10-year historical Sep average of 2.1m tonnes. Official figures will be released on 11 Oct 2022.
Indonesia plans to extend palm oil export levy waiver till year-end
On 4 Oct, Indonesia’s chief economic minister said Indonesia may extend the palm oil levy waiver till the year end. This is because the government does not see the need to collect levies, which are mostly used to subsidise biodiesel, as palm oil prices are currently lower than gasoil. The extension will help boost shipments of palm oil from Indonesia further and support local fresh fruit bunch prices. If not for the extension, the waiver of Indonesia’s export levy, which commenced on 15 Jul, would have ended on 30 Oct. Indonesia announced a fixed CPO reference price of US$792/tonne for 1-15 Oct 2022 (vs. US$846/tonne for 16-30 Sep 2022), which would lower the palm oil export tax to US$33/tonne (RM151/tonne) vs. US$52/tonne during 16-30 Sep 2022. This would place Indonesia’s export tax lower than Malaysia’s RM322/tonne, based on an 8% duty at a reference price of RM4,033 per tonne for Oct. We believe the extension of export levy waiver till year-end will help improve Indonesia’s palm oil competitiveness against Malaysia as we head into the peak production month of Oct, and could lead to weaker palm oil exports from Malaysia. Indonesia’s palm oil stock as at end-Jul 22 fell to 5.9m tonnes from 6.7m tonnes as at end-Jun, but remained higher vs. 4.13m tonnes as at end-Dec 2021.
Indonesia palm oil price discount to Malaysia has narrowed
Local CPO price in Indonesia fell 8% to Rp10,530/kg (RM3,201/tonne) on 3 Oct, from Rp11,433/kg (RM3,480/tonne) as at 31 Aug. Spot CPO price in Malaysia saw a steeper decline of 16% to RM3,377/tonne during the same period and is now at close to parity with Indonesia’s CPO price. CPO prices declined recently due to concerns over weaker global demand for edible oils, rising palm oil stockpiles and higher soybean exports from Argentina farmers. However, this is partly offset by the ongoing labour shortage situation in Malaysia and weather concerns. We expect CPO price to trade in the range of RM3,500- 4,000/tonne in Oct and favour KLK, HSP, FR and Wilmar for exposure to the sector.
