Summary
Palm oil inventory dropped below the 2m tonnes mark, thanks to strong export demand from China, India and EU.
CPO price expected to remain elevated until 1Q25 stem from production disruptions caused by the monsoon season and increased restocking activities for CNY.
Maintain Neutral rating on the sector in view of longer-term headwinds for next year.
Sector Update
Production on tapering trend. CPO production inched lower, easing by -1.3% mom to 1.8m tonnes in Oct 24. CPO production is demonstrating a tapering trend which we think is attributed to the lagging impact of drought in the early of 2024. We reckon that CPO production has peaked in Aug 24 and expect production to taper in the coming months.
Improving export. Independent cargo surveyor Intertek reported that palm oil exports for Oct 24 was 11% higher as compared to the corresponding period in Sep 24, mainly lifted by the demand recovery from China, India and EU. We believe the rising demand for cooking oil was mainly driven by festive seasons such as China’s Golden Week holiday and India’s Deepavali season. This, coupled with the upcoming enforcement of the EUDR regulation next year has prompted more EU buyers to re-stock their inventories in anticipation of higher compliance costs.
Palm oil inventory fell in tandem with the rising demand. Palm oil inventory registered at 1.88m tonnes, dropping -6.4% mom from the inventory level of 2.01m tonnes in Sep 24. The quantum of decline in palm oil inventory surpassed market expectations of -4.6% mom decline to 1.92m tonnes palm oil inventory in Sep, mainly due to the stronger-than-expected in CPO export. We opined that the steep fall of palm oil inventory in Oct 24 below the 2.0m tonnes mark is a positive surprise to the plantation sector and would support CPO prices.
CPO prices climbed in October. CPO prices rise to above RM4,300/mt level in Oct 24 after breaking the RM4,000/mt resistance in Oct 24. Average CPO price in October was RM4,388/mt, improved +9.0% mom. Looking ahead, we expect the bullish CPO momentum to persist until 1Q25 on the back of seasonally higher demand for palm oil towards year-end underpinned by restocking activities for Chinese New Year, coupled with lower production due to the monsoon season. While CPO prices are likely to stay elevated in the coming months, we believe this may not be sustainable as production from Indonesia is expected to normalise next year in absence of the influence of El Nino. Furthermore, the sector faces longer-term downside risks, including increase in India’s palm oil import duties, the enforcement of the EUDR, Indonesia lowering DMO obligation and widening negative spread between palm oil and soybean oil. Nonetheless, we have revised upward our forecast for FY25F to RM4,200/mt (from RM3,900/mt) to account for the stronger-than-expected demand outlook.
Strong recovery in 4QFY24 earnings. For the upcoming 4QFY24 results, we are expecting the earnings of planters to be generally robust on qoq basis, as the adverse impact of falling CPO production would be cushioned by the rebound in CPO price growth. We reckon pure planters such as Sarawak Plantations with lesser exposure to forward sales would likely to be the main beneficiary during a price uptrend.
Keeping Neutral stance. We are maintaining our Neutral stance on the sector at the moment in view of the potential headwinds in the following year. We keep our HOLD recommendations with a higher TP for Sarawak Plantations (FV: RM2.60), Kuala Lumpur Kepong (FV: RM21.60), Kim Loong Resources (FV: RM2.80), Hap Seng Plantations (FV: RM2.20), United Plantation (FV: RM27.50), and Sime Darby Guthrie (FV: RM4.50) to reflect our revision in CPO price forecast for FY25F.
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Currency | Buy Rates (RM) | Sell Rates (RM) |
---|---|---|
USD | 4.436869 | 4.470612 |
EUR | 4.675505 | 4.679374 |
CNY | 0.611103 | 0.611560 |
HKD | 0.570272 | 0.574102 |
SGD | 3.296965 | 3.319254 |