Plantation
Plantation Sector - Rising supply will be a concern
Fri, 05-Jan-2024 10:28 am
by Steven Chong • Apex Research

Review 

Palm oil production experienced a significant surge of +25.2% qoq (3Q23: 5.2bn tonnes, compared to 2Q23: 4.2bn tonnes), slightly surpassing our anticipated growth of +24% qoq. This surge in production can be attributed to the seasonal peak crop period in Malaysia. For the final quarter, we reckon that palm oil production is unlikely to match the previous quarter's surge and is expected to maintain a more modest increase at 3.3% qoq. We foresee production to gradually decline in December 2023 following its peak in October 2023.

Outlook. 

The average CPO price extended its decline, dropping from RM3,846/tonne in 2Q23 to RM3,809.7/tonne in 3Q23. Looking ahead to 2023, we expect the average CPO price to conclude on a softer note, mainly due to increased production outpacing demand. As we move into the 1H24, we anticipate weakness in CPO price driven by a narrowed premium spread between soybean oil and palm oil, thus diminishing the competitiveness of palm oil. Nevertheless, we maintain optimism that CPO price may experience a rebound in the 2H24 as palm oil yield is affected by the dry weather.


Valuation & Recommendation. 

We are Neutral with the sector for 2023 as we expect recovery of FFB production is neutralised by softening in CPO price coupled with inventory pilling up. For stocks under our coverage, we retain HOLD calls for Kuala Lumpur Kepong Bhd (FV: RM 20.00), Hap Seng Plantations Holdings Bhd (FV: RM1.80), Kim Loong Resources Bhd (RM1.84) and Sarawak Plantations Bhd (FV:2.04). At last, we keep our BUY call on United Plantation Bhd (FV: RM17.66) due to its inexpensive valuation and high dividend yield. The Plantation sector is trading at forward PERs of 23.2x/16.9x for 2023F/2024F and is currently above its historical three-year average of 14.6x, implying the sector has been overvalued at the moment.

Recommendation: Neutral
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