RHB Group Research analysts Hoe Lee Leng and Syahril Hanafiah have maintained their “neutral” rating on the plantation sector amid recent crude palm oil (CPO) prices decline.
In their Apr 11 report, the analysts note that the price per tonne of CPO fell 19% to a low of RM3,512 on Mar 24 in the span of three weeks, before recovering to the current level of RM3,794.
Hoe and Syahril believe the decline was mainly due to external circumstances, dragged down by the banking crises in the US, US dollar weakness as well as global commodity price weakness. This includes that of crude oil, soybean oil (SBO) and rapeseed oil.
During the period, crude oil prices fell 13% y-o-y, while SBO and rapeseed oil prices fell by 12% and 14% respectively. Although the fears of a global recession are still intact, the analysts point out that the US government has been actively reassuring the public that it is safeguarding against further banking crises.
Despite moderating upside risks, there are still supportive factors that should keep prices relatively stable, the analysts add. For one, there are weather uncertainties, as there is a risk that El Niño would return in 3Q2023 and 4Q2023. The availability of fertiliser from Russia and the impact of under fertilisation on crops in Malaysia due to labour shortages is also another factor.
Aside from China reopening, the supportive factors for stable prices include increase in biodiesel mandates given Indonesia has now moved to B35 (fuel containing a 35% mix of palm oil-based fuel) policy and intends to move up to B40 in 2024.
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Nevertheless, there are also some issues that may impact price stability. The palm oil-gas oil spread remains negative, keeping discretionary biodiesel demand at bay. Importers, on the other hand, have large stockpiles of palm oil which could impact demand in the short term.
The PO-SBO price gap has also narrowed, which renders palm oil as not as attractive as before. Lastly, the deforestation-free supply chain law in the European Union could impact demand from the region from 2024 onwards.
On the output front, Malaysia’s March output saw a 2.8% uptick m-o-m while exports jumped 31.8%, resulting in stocks falling to 1.67 million tonnes. Hoe and Syahril note that Malaysian palm oil stocks may continue to decline, albeit slightly at end-April.
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This takes into account the continued impact of Indonesia’s Domestic Market Obligation policy and export quota suspension amid Eid holidays which could drag the pick-up in output post-wet weather season. “Still, given the time it takes for major importing countries to run down their inventories before restocking again, we believe a larger pick-up in demand is only likely to come in 2H2023,” the analysts add.
Overall, RHB continues to expect CPO prices to remain range-bound between RM3,500-RM4,500 per tonne for the rest of 2023, averaging at RM3,900 per tonne.
Hoe and Syahril’s top picks include Wilmar International F34 and Golden Agri-Resources E5H as they perform better in a lower CPO price environment. Their target prices for Wilmar and Golden Agri are $4.65 and 34 cents respectively.
As at 10.10am, shares in Wilmar and Golden Agri are trading at $4.09 and 28 cents respectively.
