Hap Seng Plantations ADD, TP RM2.80, RM2.00 close
We like Hap Seng Plantations (HSP) as it trades at an attractive EV/ha of RM38.5k and offers enticing dividend yields of 11%/5% for FY22F/23F.
Kuala Lumpur Kepong ADD, TP RM24.86, RM19.80 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 acquisition of IJM Plantation.
Expect lower 3Q profit due to weaker price
- Malaysian palm oil stocks climbed to 2.31m tonnes as at end-Sep 2022 — highest since Oct 2019 — spot on against our forecast but above consensus’.
- We project palm oil stocks to rise 8.2% mom to 2.5m tonnes by end-Oct 2022F, due to Indonesia’s more competitive export tax vs. Malaysia
- We expect Malaysian planters to post weaker 3Q earnings on a yoy and qoq basis, as falling prices and rising costs trump the better production.
Malaysia palm oil stocks rose to its highest since Oct 2019
Malaysia’s palm oil stocks increased 11% mom and 32% yoy to a near-three-year high of 2.31m tonnes in Sep 2022, as rising output outpaced the recovery in exports. Palm oil stock level as at end-Sep was spot on against our prediction but 1.8%/2.2% above Reuters’/Bloomberg’s poll estimates of 2.27m/2.26m tonnes. Malaysia’s palm oil stock is trending higher due to seasonality factor and stiff competition from Indonesia’s palm oil. The rising stocks, coupled with Intertek’s report that Malaysia’s palm oil exports for the first 10 days of Oct fell 13.4% mom, are likely to dampen near-term CPO price in Malaysia.
Build-up of palm oil stock in Malaysia as Indonesia clears stock
Malaysia palm oil output of 1.77m tonnes (+4% yoy) in Sep 22 remains below potential due to worker shortages. However, the key driver for the higher stocks is the weaker recovery in palm oil exports as Indonesian palm oil players raise their exports to clear stock, as well as to enjoy the current palm oil levy waiver till end-Oct. Malaysian palm oil exports of 1.42m tonnes in Sep (-12% yoy) indicates palm oil export market share loss to Indonesia. According to GAPKI, Indonesia’s palm oil stocks fell 32% mom (or 1.87m tonnes) to 4.04m tonnes in August, as the surge in exports (+60% mom to 4.33m tonnes) far outpaced the 13.2% mom rise in output to 4.31m tonnes. Indonesia’s palm oil export tax of US$33/tonne (RM151/tonne) for 1-15 Oct 2022 was lower than Malaysia’s export tax of RM322/tonne. This makes Indonesia palm oil more competitive till at least end-Oct, and possibly through Dec if the Indonesian government extends the levy waiver till end-Dec 2022.
Expect weaker earnings from Malaysian planters in 3Q22F
We project palm oil stocks to rise 8.2% mom to 2.5m tonnes by end-Oct 2022F, as higher output trump higher exports. We believe CPO prices could trade in the RM3,500- 4,500/tonne range in Oct 2022F. CPO prices is likely to stay weak in Oct due to competition from higher Indonesian palm oil exports. However, CPO price downside will be capped by its attractive discount against competing edible oils. We project upstream planters in Malaysia to post weaker qoq and yoy 3Q22F net profits due to lower CPO prices. Average Malaysian Palm Oil Board (MPOB) CPO price fell 39.1% qoq and 9.6% yoy in 3Q22 to RM3,990/tonne, which more than offset the 13.5% qoq and 2.7% yoy rise in CPO production achieved by Malaysian estates in 3Q22. These, coupled with higher operating costs due to the hike in the minimum wage in Malaysia to RM1,500 per month effective 1 May 2022, higher fertiliser costs, as well as the windfall/Cukai Makmur tax, are likely to dent planters’ 3Q22 earnings. The downside risks for planters are supported by the sector’s dividend yields of 5.2% and low P/E valuations of 11.8x for 2022F.