Research houses neutral on plantations due to rising CPO inventory, lower demand

Research houses are retaining their “neutral” calls on the plantation sector after data revealed Malaysia’s crude palm oil (CPO) stocks increased 3% month-on-month (m-o-m) to 2.3 million tonnes at the end of January.

Exports fell 23% m-o-m and 2% year-on-year (y-o-y) to 1.14 million tonnes in January.

CGS-CIMB Research maintained a neutral call on agribusiness after the palm oil stocks rose due to higher imports and declining exports, which is the first m-o-m rise in stocks since October 2022.

“This is broadly in line with our expectation for Malaysia’s palm oil output to rise by 3.3% to 19.1 million tonnes in 2023.

“Palm oil exports fell likely due to weaker demand from key consumers like India and China, due to high palm oil stocks in their respective countries,” it said in a research note today.

On the other hand, CGS-CIMB projected palm oil stocks to rise 0.6% m-o-m to 2.28 million tonnes by the end of February.

“We also expect planters to report weaker earnings, both quarter-on-quarter (q-o-q) and y-o-y, due to lower CPO prices and rising costs.

“Average CPO price fell 2% q-o-q and 24% y-o-y to RM3,910 per tonne in the fourth quarter of 2022, while the cost of production has risen due to higher minimum wage since May 1, 2022, and higher fertiliser costs,” it added.

CGS-CIMB said it expected CPO to trade in the RM3,700 to RM4,200 per tonne range in February and key factors driving CPO prices include Indonesia’s decision to suspend some palm oil export permits to secure domestic supply amid rising cooking oil prices ahead of upcoming Islamic festivals.

Other factors are Indonesia’s plans to raise its biodiesel mandate to 35% in February, from 30% previously, which will boost palm oil usage in Indonesia.

Overall, CGS-CIMB expects CPO prices to soften in the second half of this year and maintain its average CPO price forecast of RM3,800 per tonne for 2023.

Meanwhile, MIDF Research forecasted the CPO price to trade volatile from February to March at around RM3,500 to RM4,000 per tonne, benefitting from price disparity between CPO against soybean oil (SBO) prices which to date amounted to US$445 per tonne and the three years average of US$246.2 per tonne, based on three months future price.

“However, we also recognise its downside risk on fragile demand outlook on the back of inflationary pressure coupled with tight household spending on high base interest rate locally and globally, and another Indonesian extension of zero-levy policy for palm oil exports in 2023,” it said in a separate note.

MIDF maintained its “neutral” stance on the sector with a CPO target price of RM3,500 per tonne for 2023.

Meanwhile, Hong Leong Investment Bank (HLIB) said CPO stockpiles would likely resume based on downtrends this month on the back of a seasonally low production cycle and higher export demands, as higher biodiesel admixture and lower export quota in Indonesia will likely boost export demand in Malaysia.

In its research note, HLIB maintained 2023-2024 CPO price assumptions of RM4,000 per tonne and RM3,800 per tonne.

“We believe CPO price will sustain above RM4,000 per tonne over the next few months, possibly until the first quarter of 2023, and start trending down from the second quarter onwards,” it added.

HLIB said it reiterated its “neutral” stance on the sector, given the absence of any notable earnings growth catalyst.

Tags: exports, price, Crude palm oil, Malaysia, palm oil, forecast, stocks, output, CPO, CGS-CIMB