KUALA LUMPUR (Oct 11): The rise in palm oil output, coupled with a modest increase year-on-year (y-o-y) in the average crude palm oil (CPO) price achieved in 3Q2024, are likely to boost the earnings of plantation companies, CIMB Securities noted in its report on Friday.
"The 7% y-o-y rise in 3Q2024 palm oil output, coupled with a 4.7% y-o-y rise in the average CPO price achieved in 3Q2024, is expected to lift plantation companies' earnings," said CIMB Securities in a note on Friday.
Notable players such as SD Guthrie Bhd (KL:SDG), IOI Corp Bhd (KL:IOICORP), Ta Ann Holdings Bhd (KL:TAANN), and Hap Seng Plantations Holdings Bhd (KL:HSPLANT) stand to benefit with analysts from CIMB maintaining an “overweight” rating on the sector.
The house noted that Malaysian palm oil stocks have increased by 6.9% month-on-month in September 2024, reaching an eight-month high of two million tonnes which was primarily driven by a 38.4% decline in domestic consumption.
The increase has surpassed industry forecasts, including those from Reuters and Bloomberg signalling a shift in the sector amid fluctuating local demand and export dynamics.
Despite rising stock levels, CIMB maintained a neutral stance on the plantation sector, noting that CPO prices may continue to ride on the recent crude oil price spike.
This is also largely due to a robust palm oil export growth during the first 10 days of October, with exports climbing by 18.8% and 13.6% according to Amspec and Intertek, respectively. These gains are expected to offset the elevated stock levels.
Palm oil production, however, faced a slight setback, falling 3.8% m-o-m in September to 1.82 million tonnes.
Although production stayed flat y-o-y, output from Peninsular Malaysia helped offset weaker results in East Malaysia, contributing to a cumulative 9% growth in production over the first nine months of 2024.
A series of regulatory changes are also set to affect the global edible oil market, with India raising the import of palm oil by 20% in September while Indonesia lowered its palm oil export levy to maintain its competitive edge.
Meanwhile, the European Commission has delayed the implementation of regulations aimed to combat deforestation by 12 months.
Despite the stronger ringgit appreciating by 7% to RM4.29/USD since August, spot CPO prices have risen by 10%, driven by supply concerns.
CIMB analysts are maintaining their average 2024 CPO price forecast at RM3,900 per tonne, as the current price averages RM4,003 pertonne for the first nine months of the year.
With stock levels projected to rise another 1% m-o-m in October, driven by higher production, the outlook for the palm oil sector remains cautiously optimistic.
Meanwhile, RHB Research warns that demand rationing may take place in the short term, as CPO prices now look unattractive versus those of other oils.
The house noted that while CPO prices have risen over the last week, the commodity is trading at RM4,200-4,300 per tonne, with year-to-date prices at RM4,017 per tonne currently, ie slightly above its 2024 CPO price assumption of RM3,900 per tonne.
"The increase in prices was likely led by the spike in crude oil prices as a result of geopolitical risks [+19% over the last month] and happened despite the weakening of the USD [vs the normally inverse relationship].
RHB estimates that the correlation between CPO and gasoil prices has now risen to 0.52 (from -0.1 in Jan-Aug 2024).
Assuming geopolitical risks continue to heat up and crude oil prices remain on an upward trend, CPO prices may follow suit, it added.
Nonetheless, RHB said while its 2024 in-house crude oil forecast of US$82 per barrel, its CPO price forecast of RM3,900 per tonne remain unchanged for now.