PETALING JAYA: The weak palm oil harvest for February is neutral for the market given it was seasonally a low production season.
However, Hong Leong Investment Bank (HLIB) Research believes the stockpile will resume its uptrend from March as production will likely pick up although exports may remain weak on the back of weak price competitiveness over competing oils.
The inventory of palm oil remained on downtrend, falling by 5% month-on-month (m-o-m) to 1.92 million tonnes in February 2024 – the lowest in seven months.
Exports declined by 24.7% m-o-m to 1.02 million tonnes in February, the lowest since February 2021, said HLIB Research in a report.
This was due to lower exports to Africa, Asia Oceania, the European Union and India, but partly mitigated by higher exports to China.
“We maintain 2024-2025 crude palm oil (CPO) price assumptions of RM4,000 and RM3,800 per tonne as we expect the El Nino’s impact on palm production and prices to kick in around mid-2024,” HLIB Research said.
Year-to-date, the price of CPO averaged at RM3,910 per tonne.
Considering the absence of a demand catalyst, the research house is “neutral” on the sector, with IOI Corp Bhd
and Hap Seng Plantations Holdings Bhd as its top picks.
On the other hand, TA Research expects the low-yielding season to persist until the first quarter of 2024 (1Q24) before production picks up again in 2Q24.
“We expect production to enter the uptrend cycle in May instead of March this year as the Ramadan festival celebration ends in April.
“Note that the number of workers in Malaysia and Indonesia will reduce significantly during Ramadan, resulting in a decline in palm oil production,” said TA Research.
Additionally, it said India is likely to buy more soybean oil in 2024 due to the negative refining margins in palm oil versus soybean oil and other rival oils.
“The premium of soy oil futures over palm oil futures has been reduced from its peak of US$803 per tonne to around US$127 per tonne recently. This may weaken the competitive advantage of palm oil and limit the upside of CPO price to a certain extent,” it added.
As for China, the country’s overall vegetable oil demand is expected to stay slow until April, as it is typically an off-season after the Chinese new year holiday break.
Thus, restocking activity may not happen any time soon, said the research firm, which reiterates its “underweight” recommendation for the plantation sector.
It made no change to its 2024 average CPO price estimate of RM4,000 per tonne.
“We would review our assumptions if South American soybean supply turned out lower than the market’s expectation, a more promising demand recovery story and significant reduction in production costs.”
Meanwhile, Kenanga Research said the Bursa Plantation Index strengthened 3% quarter-on-quarter (q-o-q), nudging the firm’s sector price-to-book value (PBV) from 1.1 times to 1.2 times.
“Supported by an already low PBV, we have highlighted that the downside to sector equity prices may be quite limited but a strong sector outperformance could be hindered by the lack of a strong upside catalyst,” it said.
It added that the year-to-date Plantation Index rise was still within the index’s 10-year historical 4% q-o-q seasonal swing during January-March period.
Kenanga Research keeps its “neutral” call on the sector because it can be “defensive with gradual increments in price inflation over time” as palm oil is largely for food usage despite a growing biofuel market.
The gearing of most plantation companies are also manageable with cash generative upstream operations.
Lastly, it said the value of agriculture land, especially those along the west coast of Peninsular Malaysia, is often significantly higher than its book value.
