As Dec, 21 palm oil inventory came in way below market expectation, where we believe is mainly due bulk purchase of cooking oil as food aid for the flood victims and restocking ahead of Chinese New Year. We reckon that CPO prices would remain high.
- Inventory way below market expectation. The Malaysian Palm Oil Board reported lower-than-expected inventory of 1.58m tonnes vs market expectation1.70m tonnes as at end-Dec 21. Having said that, if we look at production and exports alone, the reported numbers are in line with market expectations.
- The variance mainly came from higher-than-expected domestic consumption which we reckon was partly contributed by the bulk cooking oil purchases by the government and NGOs as food aid for the flood victims and could also be restocking by wholesalers ahead of the Chinese New Year demand.
- 2021 total production within our expectation. Despite the recent heavy rainfall and severe floods in some of the regions in Malaysia in Dec 21, the production came in in line with market expectation at 1.45m tonnes (-11.3% mom). This is mainly due to the readiness of plantation companies when it comes to a flood situation where most of them are well prepared with good drainage systems and the skillsets to handle such situations (such as harvesting and evacuating fresh fruit bunches (FFB)). For 2021, total production come in well within our expectation at 18.1m tonnes (-5.4% yoy).
- Maintain UNDERWEIGHT. We believe CPO prices may sustain at these levels in 1Q22 due to short-term supply tightness. Our CPO price assumptions are at RM3,800/tonne and RM3,000/tonne for 2022-23. Having said that, we remain UNDERWEIGHT for the sector as we expect earnings to contract by 24% in 2022 as compared with a >100% yoy growth in sector earnings in 2021 which failed to lift the plantation stocks’ performance. This sector is unlikely to outperform the market with the expected earnings contractions for 2022 and 2023.
- For investors with appetite for good dividend yield, they may consider to HOLD companies with decent dividend yield at about 8%, such as Kim Loong Resources (KIML MK), Hap Seng Plantations (HAPL MK), Sarawak Oil Palm (SOP MK), Kuala Lumpur Kepong (KLK MK). Our top pick for the sector is still HAPL as it gives the highest dividend yield with a dividend yield of 8% in the upcoming results announcement in Feb 22.