by M JAY SHEILA / pic by Bloomberg

CGS-CIMB Securities Sdn Bhd (CGS-CIMB Research) expects 2023 to be a more challenging year for palm oil planters due to falling crude palm oil (CPO) prices.

In a report today, it noted that Malaysia’s palm oil stocks fell 5% month-over-month (MoM) but rose 26% year-on-year (YoY) to 2.3 million tonnes in November 2022. This, it said, represents the first MoM decline in closing stocks since May 2022 which indicates that Malaysian palm oil stocks may have peaked in October 2022 and are likely to trend lower until February 2023.

It noted that the stock level was 5.4% below its forecast of 2.42 million tonnes due mainly to lower-than-expected production and imports. 

It added that palm oil stock level at end-November was also 4.2% and 5.4% below a news agency and Bloomberg, and its estimate respectively, due mainly to lower than expected production.

“We project palm oil stocks to fall a further 13.6% MoM to 1.98 million tonnes by end-December 2022F. 

It explained that the lower than expected rise in palm oil inventories, coupled with independent inspection company AmSpec Agri Malaysia’s report that Malaysia’s palm oil exports for the first 10 days of December grew 14.3% MoM, are positive for near-term CPO prices.

CGS-CIMB Research remarked that palm oil prices are likely to stay firm in the first quarter of 2023 (1Q23) but could decline from 2Q23.

It also predicted palm oil prices to stay firm at RM3,800-RM5,000 per tonne at the start of the 1Q23 due to several factors. 

Firstly, it said that there are concerns over supply risks due to ongoing drought in Argentina — the worst in 50 years — that could lead to severe soybean crop losses, heavier-than-usual rainfall in key oil palm regions due to the third consecutive year of La Nina, and lower sunflower seed production from Ukraine due to ongoing war with Russia. 

Secondly, it noted that, biodiesel demand is rising as Indonesia plans to raise its biodiesel mandate to B35, and the US is seeing increasing renewable diesel capacities. And thirdly, it pointed out that imports of edible oils by China would likely rise as it loosens its Covid-19 rules. 

Meanwhile, CGS-CIMB said, the first quarter is the lowest production season for palm oil and expects the shortage of foreign workers to be resolved only in the second half of 2023.

It mentioned that data from the top 10 members of the Malaysian Palm Oil Association reveal that the approved number of incoming foreign workers only met 19% of the total required by the companies.

“We believe CPO prices could soften from 2Q23F onwards as CPO supply recovers with the entry of more foreign workers while slower global growth could curb demand. We project average CPO prices of RM5,122/RM3,800 per tonne for 2022F/2023F,” it opined. 

Given the limited re-rating catalysts, CGS-CIMB maintained the plantation sector at Neutral as it believes that the market has priced in lower CPO prices. Its top picks for the sector are Kuala Lumpur Kepong Bhd (KLK), Hap Seng Plantations Holdings Bhd (HSP), and Ta Ann Holdings Bhd as value play.

Meanwhile, Kenanga Investment Bank Bhd (Kenanga Research) downgraded the plantation sector to Neutral from Overweight due to higher costs.

“The sector’s defensive cash flows and balance sheet especially amidst ongoing uncertain economic outlook remain attractive factors but higher costs are looking sticky and structural. Coupled with easier CPO prices, upside catalyst potential is getting thinner,” it said in a separate report today.

It pointed out that the KL Plantation Index has continued to hold up against the broader market trend, underpinned by resilient food and fuel demand, asset-rich book value and undemanding valuations amidst global economic uncertainties.

However, it noted that margins are facing pressures from easier palm oil prices compounded by the rising cost of labour, fertiliser and transportations.

Hence, we downgrade the sector from ‘Overweight’ to ‘Neutral’ in view of weaker upside potentials ahead,” it said.

Within the sector, Kenanga Research likes those with the ability to expand upstream such as KL Kepong Bhd, and TSH Resources Bhd or those with attractive yields such as HSP.