HLIB Research believes that CPO stockpile will likely increase further in coming month, on the back of seasonally higher output trend, Indonesian government’s move to accelerate palm oil exports, and the absence of seasonal-driven demand catalysts. — Bernama photo
KUCHING (July 13): Stockpiles of crude palm oil (CPO) increased by 8.8 per cent month on month (m-o-m) to 1.66 million tonnes in June, boosted by higher output and lower exports.
CPO output increased by 5.7 per cent m-o-m to 1.55 million tonnes in June, as peak production season began with output contribution from Peninsular Malaysia estates increased by 8.3 per cent m-o-m, while East Malaysia estates increased by a smaller magnitude of 2.5 per cent.
Year to date, output fell by 1.1 per cent to 8.27 million tonnes in the first half of 2022, dragged mainly by lower output in East Malaysia.
Researchers with Hong Leong Investment Bank Bhd (HLIB Research) believe that CPO stockpile will likely increase further in coming month, on the back of seasonally higher output trend, Indonesian government’s move to accelerate palm oil exports, and the absence of seasonal-driven demand catalyst.
To note, CPO price has fallen by more than 45 per cent from its peak of RM8,074 per metric tonne in early March 2022, averaging at RM6,209 per metric tonne year to date.
“While Indonesia’s move to flush out palm oil inventories will likely suppress near term CPO price, the recent severe CPO price decline is overdone, as supply prospects of major vegetable oil remains uncertain; and demand prospects have turned more favourable, on the back of palm’s improved price competitiveness, low inventory levels among major importing countries, and more favourable palm oil-gas oil (POGO) spread.
“Hence, we maintain our 2022-2024 CPO price assumptions of RM5,500, RM4,500 and RM3,800 per tonne.”
HLIB Research kept its overweight stance on the sector, supported by an anticipated recovery in CPO price; and commendable valuations (after recent sharp retracement in share prices).
MIDF Amanah Investment Bank Bhd (MIDF Research) anticipate that the CPO price will remain elevated in 2H22 as the price level will be supported by higher price of edibles oil on the back of supply concerns amid Russia–Ukraine prolongs war (disrupted sunflower supply); subdued production outlook for soybean in 2022/23 due return in La-Nina in third year in a row in South America such Brazil and Argentina compounded by lower planted area in US; and improved demand outlook on improved economic activities.
“Despite our positive view on the sector, we do expect the CPO price will ease in 2HCY22 but at a gradual pace on concern of inflationary pressure globally after achieving higher-than-expected CPO price in 1H22.
“As such, we maintained our 2022 CPO price forecast of RM5,500 per MT at this juncture. In line with this, we reaffirm our positive stance on plantation sector.”
The appeal of the plantation sector is no longer about earnings recovery but increasingly about earning resilience, Kenanga Investment Bank Bhd (Kenanga Research) said, especially when inflationary and weakening economic concerns are clouding the market.
“Firstly, plantation earnings look set to stay healthy on resilient demand for palm oil,” it said in its sectoral. “The sector’s defensive asset-rich NTA is another attraction and valuations are not excessive either, especially after the recent market sell-down.
“However, with CPO prices likely to remain elevated into 2023, robust margins can be expected despite rising costs.
“For these reasons, we upgraded the sector from neutral to outperform about a month ago, a view we are maintaining.”