Apex Securities sees CPO prices at RM3,300-RM3,600 per MT amid higher production in 2H2023
16/06/2023 (The Edge Malaysia), Kuala Lumpur - Apex Securities Bhd expects crude palm oil (CPO) prices to average between RM3,300 and RM3,600 per metric ton (MT) for the remainder of 2023, weaker than its 2022 average, amid higher CPO production in the second half of the year (2H2023).
In a research note on Friday (June 16), Apex also expects modest growth in palm oil exports with milder external demand, while palm oil inventory is expected to fall due to Indonesia’s domestic market obligation (DMO) and export quota ban.
It maintained its "neutral" call on the sector, as CPO prices face headwinds in 2023, and its top pick for the sector is United Plantations Bhd, with a "buy" call and a target price (TP) of RM17.40, based on 15 times price-earnings ratio (PER) for the financial year ending Dec 31, 2023.
Apex predicts that CPO price weakness will persist, despite the ongoing Russia-Ukraine war that has affected supply of vegetable oil.
However, soybean prices are expected to decline in 2023, as supply outstrips demand, narrowing the price spread between palm oil and soybean oil.
“Historically, soybean oil is traded at a premium to palm oil, but a narrowing spread between the two commodities could affect trade flows.”
Price spread is around US$400 (RM1,847.39) per tonne, down from a high of US$830 in late 2022, it said.
Apex also expects a modest growth in palm oil exports, but external demand will grow marginally, due to softer demand from Europe, offset by any increase in demand from China, India and other countries.
“Malaysian palm oil exports are forecast to increase modestly by 3.7% year-on-year to 16.9 million tonnes on higher production,” it said.
It also said that demand could worsen due to a global economic slowdown, amid high inflation and rising interest rates.
Apex added that CPO production and inventory will reach an all-time high in 2H2023, due to an influx of foreign labour and favourable weather, with the passing of La Nina in 2022.
“Going forward, palm oil production should peak in 2023, before starting to fall off in late 2024.
“The Malaysian Palm Oil Board has estimated palm oil production to rise by 3% to 19 million tonnes in 2023, from 18.45 million tonnes in 2022.”
Meanwhile, palm oil inventory is expected to fall in the following months, as Indonesia’s DMO and export quota ban will reduce exports with Malaysia to fill the gap.
“Nevertheless, Indonesia will begin easing its palm oil export rules gradually, and reduce the DMO for palm oil producers starting from May 2023.
“As a result, palm oil inventory is expected to rise in 2H2023, as supply improves.”
On the emerging El Nino weather phemonemon, it said that it will only see the impact on fresh fruit bunch yields next year, since production lags behind from change in weather condition by six to nine months.
“Historically, El Nino has brought dryness to oil palm estates, resulting in lower fruit yields.
“Should the prediction occur, it may drive CPO prices up in late 2024.”
Apex’s "neutral" call was due to Bursa Malaysia's Plantation Index trading below its historical average forward PER of 18.8 times, with market leaders commanding premiums at 23.3 times PER, reflecting the anticipated downcycle that created weak market sentiment.
Nevertheless, it presents an opportunity for bottom-fishing for undervalued plantation stocks, and a potential uptick in CPO prices in late 2024.
Apex's top company pick was United Plantations due to undemanding valuations, where the target PER is considered inexpensive compared to integrated planters while offering a decent dividend yield at 6%. It also showed prudent management.
Other plantation companies in Apex's calls include Kuala Lumpur Kepong Bhd or KLK (hold; TP: RM22.50), Hap Seng Plantations Holdings Bhd (hold; TP: RM2.00), and Sarawak Plantation Bhd (sell; TP: RM1.74).
At the time of writing, United Plantations’ share price had risen by 16 sen or 1.06% to RM15.26, with a market capitalisation at RM6.35 billion.
KLK’s share price was 12 sen or 0.55% lower at RM21.62. Its market capitalisation was RM23.37 billion.
Hap Seng’s share price was four sen or 2.11% lower at RM1.86, with a market capitalisation of RM1.49 billion.
Sarawak Plantation’s share price was one sen or 0.49% higher at RM2.05, valuing the company at RM574 million.