Malaysian Plantation Sector Analysis – November 12, 2024

Broker: UOB Kay Hian

Date: November 12, 2024

Sector Update

Plantation – Malaysia

The latest data from MPOB for October 2024 reveals a sluggish rebuild in inventory due to increased exports and declining production. Crude palm oil (CPO) spot prices have soared to RM5,060.5 per tonne, driven by concerns over supply tightness. Our 2024 CPO price assumption stays at RM4,200 per tonne, aligning with forward curves and spot prices suggesting a full-year average of RM4,200 per tonne. Despite muted near-term catalysts, we maintain a MARKET WEIGHT stance on the sector.

MPOB’s October 2024 Statistics

• CPO Production: 1.80 million tonnes (-1.3% MoM, -7.2% YoY)
• Palm Oil Stocks: 1.88 million tonnes (-6.3% MoM, -23% YoY)
• Palm Oil Domestic Use: 0.21 million tonnes (-16.9% MoM, -43.8% YoY)
• Palm Oil Exports: 1.73 million tonnes (+11.1% MoM, +17% YoY)
• Oleochemical: 0.27 million tonnes (+3.9% MoM, +0.7% YoY)
• Biodiesel: 0.01 million tonnes (-34.5% MoM, -78.6% YoY)
• Palm Oil Imports: 0.02 million tonnes (+198.2% MoM, -65.6% YoY)
• CPO Price: RM4,387.5/tonne (+9% MoM, +20.5% YoY)

Market Dynamics

In October 2024, MPOB data aligned well with market expectations. Production was lower, while export numbers were higher month-over-month (MoM) and year-over-year (YoY). However, inventory levels fell due to increased exports.

Production

CPO production decreased to 1.80 million tonnes, a 1.3% decline MoM and a 7.2% drop YoY. Year-to-date (YTD) CPO production has risen by 6.7% YoY, steadily increasing in monthly comparisons.

Exports

Palm oil exports in October 2024 surpassed market expectations, reaching 1.73 million tonnes, an 11.1% increase MoM and a 17% increase YoY. Exports to India and China surged by 55% and 10.6% MoM, respectively, due to the festive season. Exports to Africa, the EU, and the Middle East also showed MoM increases based on cargo survey data.

Inventory

Inventory came in below market expectations at 1.88 million tonnes, a 6.3% decline MoM and a 23% drop YoY. The slower-than-expected inventory rebuild was attributed to higher export numbers in October 2024.

Action and Recommendations

Maintain MARKET WEIGHT

We maintain our MARKET WEIGHT stance on the sector, following downgrades of some big-cap names in 2Q24 earnings due to muted near-term catalysts. Our only BUY call is Hap Seng Plantations (HAPL MK/BUY). We appreciate the company for its upstream exposure, favorable production trend, and high dividend yields.

2024 CPO Price Assumption

Our 2024 CPO price forecast remains at RM4,200 per tonne. Current spot prices of RM5,060.5 per tonne and forward curves imply a full-year average of RM4,200 per tonne.

Stock Picks

Detailed Company Analysis

Hap Seng Plantations (HAPL MK/BUY)

Hap Seng Plantations stands out for its upstream exposure, favorable production trend, and high dividend yields. The company’s share price is RM2.04 with a target price of RM2.25. It has a market cap of \$369.9 million. The price-to-earnings (PE) ratios are 16.5x for 2023, 10.0x for 2024, and 15.3x for 2025, with a return on equity (ROE) of 4.7% and a price-to-book (P/B) ratio of 0.8x. The dividend yield is 5.8%.

Genting Plantations (GENP MK/HOLD)

Genting Plantations is recommended as HOLD with a share price of RM5.51 and a target price of RM5.15. The company has a market cap of \$1,120.8 million. The PE ratios are 15.9x for 2023, 18.2x for 2024, and 18.8x for 2025. It has a ROE of 4.8%, a P/B ratio of 0.9x, and a dividend yield of 3.1%.

IOI Corporation (IOI MK/HOLD)

IOI Corporation is also recommended as HOLD, with a share price of RM3.95 and a target price of RM3.60. The company’s market cap is \$5,556.0 million. The PE ratios are 16.7x for 2023, 23.2x for 2024, and 18.8x for 2025. It has a ROE of 9.6%, a P/B ratio of 2.1x, and a dividend yield of 3.7%.

KL Kepong (KLK MK/HOLD)

KL Kepong is recommended as HOLD, with a share price of RM22.34 and a target price of RM19.50. The company’s market cap is \$5,553.5 million. The PE ratios are 26.0x for 2023, 26.3x for 2024, and 19.5x for 2025. It has a ROE of 5.8%, a P/B ratio of 1.7x, and a dividend yield of 3.4%.

Kim Loong (KIML MK/HOLD)

Kim Loong is recommended as HOLD, with a share price of RM2.62 and a target price of RM1.95. The company’s market cap is \$579.8 million. The PE ratios are 15.4x for 2023, 17.5x for 2024, and 13.8x for 2025. It has a ROE of 17.4%, a P/B ratio of 2.8x, and a dividend yield of 5.9%.

SD Guthrie (SDG MK/HOLD)

SD Guthrie is recommended as HOLD, with a share price of RM5.13 and a target price of RM4.75. The company’s market cap is \$8,043.9 million. The PE ratios are 43.1x for 2023, 24.1x for 2024, and 23.5x for 2025. It has a ROE of 9.6%, a P/B ratio of 1.8x, and a dividend yield of 2.5%.

Sarawak Oil Palms (SOP MK/HOLD)

Sarawak Oil Palms is recommended as HOLD, with a share price of RM3.61 and a target price of RM3.00. The company’s market cap is \$730.3 million. The PE ratios are 10.7x for 2023, 8.3x for 2024, and 7.3x for 2025. It has a ROE of 8.8%, a P/B ratio of 0.9x, and a dividend yield of 2.4%.

Outlook for November 2024

• Production to Decline: We foresee a decline in production in 4Q24, following its peak in July and August 2024, with a subsequent decline in September 2024.
• Exports to Moderate: Demand from major importers like India and China may begin to moderate after the festive season. Palm oil is currently trading at a premium to other vegetable oils, which could encourage buyers to switch to cheaper substitutes.
• Inventories to Increase Marginally: We expect an inventory rebuild in the second half of 2024, driven by lower exports and expectations of slower production.

Sector Catalysts

2H24 Earnings Outlook

We expect Malaysian planters to report stronger earnings in the second half of 2024 compared to the first half, driven by seasonal production increases and higher average prices for CPO and palm kernel. In 3Q24, earnings are anticipated to rise quarter-over-quarter (QoQ) due to increased production, with spot CPO prices averaging RM4,000 per tonne. For 4Q24, results are expected to be relatively stable QoQ, as lower production will likely be balanced by higher average selling prices (ASPs). Notably, Hap Seng Plantations could benefit from the heightened CPO price due to its upstream exposure and favorable production.

Price Premium on Tightness in Supply

The average CPO spot prices surged by 9% MoM or 21% YoY to RM4,387.5 per tonne for October 2024. The YTD average is RM4,072 per tonne, up 5.7% YoY. CPO spot price hit RM5,060.50 on November 8, 2024, up 36% from end-December 2023. Factors contributing to this include palm oil production shortfalls and Indonesia’s planned implementation of a higher biodiesel mandate in 2025, sustaining a price premium compared to other vegetable oils. Despite the recent surge in prices, we anticipate CPO spot prices to trade between RM4,500 and RM5,000 per tonne for the remaining months of 2024.

Prices to Ease as Production Improves

We expect the price range of RM4,500-5,000 per tonne to be sustained at least through 1Q25, as production typically begins to peak in 2Q and 3Q. This increase in production is likely to ease supply pressures, leading to a gradual moderation in prices in the following quarters. However, potential surprises in production due to a possible La Niña event in 4Q24 could lead to weaker-than-expected production, driving CPO prices higher.

Monitoring La Niña’s Emergence in Late-2024

The potential onset of La Niña in late-2024 remains a wildcard weather risk, given the uncertainty of its occurrence and potential severity. La Niña’s supply disruption risks appear more pronounced for soybean plantings in the Americas region, with relatively drier conditions being observed.

October 2024 CPO Production by Region and States

• Johor: 0.28 million tonnes (-6.0% MoM, -9.0% YoY)
• Pahang: 0.31 million tonnes (-6.9% MoM, -1.0% YoY)
• Perak: 0.15 million tonnes (-4.6% MoM, -11.9% YoY)
• Negeri Sembilan: 0.06 million tonnes (-3.9% MoM, -2.2% YoY)
• Selangor: 0.05 million tonnes (-5.2% MoM, +1.6% YoY)
• Terengganu: 0.05 million tonnes (+1.6% MoM, -3.7% YoY)
• Kelantan: 0.03 million tonnes (-1.9% MoM, -11.1% YoY)
• Kedah: 0.02 million tonnes (-11.8% MoM, -20.1% YoY)
• Other States: 0.02 million tonnes (+0.6% MoM, -19.3% YoY)
• Peninsular Malaysia: 0.97 million tonnes (-5.4% MoM, -6.4% YoY)
• Sabah: 0.43 million tonnes (+10.3% MoM, -5.2% YoY)
• Sarawak: 0.39 million tonnes (-2.4% MoM, -11.1% YoY)
• East Malaysia: 0.83 million tonnes (+3.9% MoM, -8.1% YoY)