BUMITAMA AGRI LTD. (SGX:P8Z)
FIRST RESOURCES LIMITED (SGX:EB5)
Regional Plantation - Not In A Hurry To Buy Palm Oil
- India and China are not in a hurry to replenish their stocks despite low inventory levels. India’s vegoil inventory remains stable while the Chinese government has started to release vegoil from its national reserves to ease the supply tightness.
- CPO prices could weaken once the export backlog eases in Indonesia and more vegoil supply comes on-stream in 2H22. However, the sudden short-term supply squeeze will sustain the current high prices.
- Maintain MARKET WEIGHT.
WHAT’S NEW
- We hosted Mr Sudhakar Desai, President of Indian Vegetable Oil Producers’ Association and CEO of Emami Agrotech, and Mr Desmond Ng, Chief Representative of Malaysian Palm Oil Council’s (MPOC) Shanghai Representative Office at our recent UOB Kay Hian Annual Palm Oil Outlook Webinar. We remain MARKET WEIGHT on the sector.
- Some of the highlights are:
- Not in a hurry to replenish their stocks. Mr Desai mentioned that India’s current vegetable oil (vegoil) inventory level is still at a comfortable level, which covers about 50 days of consumption, and thus only expects India to import 450,000-500,000 tonnes of palm oil (PO) per month vs the usual 600,000-700,000 tonnes/month due high prices. By April, mustard oil will start to enter the market and ease the supply tightness caused by slower arrival of sunflower oil (SFO). In China, Mr Desmond noted that despite the low vegoil inventory in China, buyers are cautious in buying PO due to the current high prices.
- India’s vegoil consumption will drop by 2.5-3% y-o-y in 2022 (or 500,000 tonnes of demand rationing) mainly due to:
- lower edible oil consumption per capita (as a result of high import prices),
- slower consumption in the HORECA sector at about 3% y-o-y growth (vs 2021 at 7-8% y-o-y), and
- increase in Indian domestic edible oil production.
- India’s vegetable oil import is expected to reduce to 12.96m mt in 2021/22 (vs 14m mt in 2020/21).
- Palm oil supply may turn better in Apr 22. Mr Desai expects the current palm oil logistics backlog in Indonesia to be resolved in one month in view of more exporters getting their export licence from the government. Hence, we might see some CPO price corrections.
Palm olein is at a premium to soybean oil (SBO) in China, which has led to less aggressive buying.
- China's palm oil imports are expected to be flat at 6.7m tonnes in 2022, vs 6.63m tonnes in 2021. Mr Desmond mentioned that despite the strong need for China to restock its vegetable oils, its buying interest of palm oil is still low due to high prices. In addition, the Chinese government has been purchasing more oilseeds for its national reserves in the past two years, and they have currently released the oilseeds reserve in the market to ease the tight vegoil supply situation.
- Based on Mr Desmond’s estimate, the Chinese government has reserved 1.5m-2.0m mt of rapeseed and soybean. The Chinese government might restore its reserves again after supplying to the market, but only when they see weakness in prices.
- China’s soybean meal demand is expected to continue to grow at a low rate in 2022 in view of the change in the composition of protein sources according to its national policy. This will continue to impact the crushing activity and soybean oil output.
Maintain MARKET WEIGHT on plantation sector.
- We reckon that the current RM7,786/tonne CPO price may not be sustainable. The elevated price is likely to stay longer and higher than expected. This will continue to drive investors’ appetite towards plantation stocks which have underperformed in the last three years. Our BUYs are Bumitama Agri (SGX:P8Z), Triputra Agro, and Hap Seng Plantations.
- We believe that the recent rally in plantation companies’ share price of more than 30% has priced in the surge in CPO prices and factors in CPO ASP of closer to RM5,000/tonne for 2022 (vs our CPO price assumption of RM4,200/tonne). The CPO forward price curve is currently a very steep backwardation curve, which indicates an improvement in the palm oil supply-demand situation. In the very immediate term, any relaxation of Indonesia’s exports control will have pressure CPO price.
- We still see value in our four BUYs, which are Bumitama Agri (SGX:P8Z), First Resources (SGX:EB5), Triputra Agro, and Hap Seng Plantations. Among the big cap plantations in Malaysia, we prefer KL Kepong as it is expected to see stronger production recovery in FY22 as it can ride on current high price. Sime Darby Plantation has the largest CPO volume, so its earnings have the highest leverage to rising CPO prices.
- The beta. Should the high prices be sustained for longer periods, pure upstream players would have higher leverage and beta to the CPO uptrend. Among companies under our coverage, Sime Darby Plantation, Hap Seng Plantations, Triputra Agro and Astra Agro Lestari are those with higher earnings sensitivity towards CPO prices.
Sector Risks
- Backlog issue and cooking oil shortage issues to be resolved in Indonesia. If the backlog issues in Indonesia’s ports are resolved with exporters getting their export licences after fulfilling the Domestic Market Obligation (DMO), we expect buyers to turn to Indonesia as Indonesia’s palm oil products are still at a discount to those from Malaysia. There is also market talk that the Indonesian government may relook into lowering the percentage of domestic sales from the current 20% once the cooking oil shortage in Indonesia eases.
- Increase in US soybean planting area. The US$A expects farmers to plant 88m acres of soybeans for 2022, up by 0.8m acres from 87.2m acres in 2021. This may result in higher-than-expected soybean production in the market for 2022, and hence, we might see some price weakness in SBO moving forward.
Jacquelyn Yow Hui Li
UOB Kay Hian Research
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Leow Huey Chuen
UOB Kay Hian
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https://research.uobkayhian.com/
2022-03-04
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