Malaysia’s CPO output decreased to 1.20m tonne (- 7.1% mom; -18.2%yoy), but it has remained steady year to date at 5.12m tonne. The nation’s average FFB yield fell by -14.5%yoy to 1.00 tonne/ha as a result of slower production levels in the majority of the states during the worst seasonal months, although OER remained moderate at 20.03% due to better evacuation actions during dry months. However, performance was significantly hindered by fewer manuring activities completed the previous year (on a combination of labour shortage and a lower round of fertiliser implication) exacerbated by unfavourable weather impacts (El-Nino) 2-years in a row.

Despite Eid-al-Fitr celebrations, Palm oil exports were muted in April to 1.07 tonne following a tight household spending pattern on the back of higher interest rates globally. Nonetheless, demand remained supported by selected Middle-East nations that have some weight (based on CY22 total trade), such as Turkiye, Pakistan, Saudi Arabia, Egypt, and Iran.

Closing stockpiles in Apr-23 reduced to 1.50m tonne (-8.9% yoy) in tandem with slower CPO supply. Both stocks, CPO and Processed PO are down -7.7%yoy and -10.4%yoy respectively, dragged by weaker contributions from the Peninsular and Sarawak areas. Research house MIDF believes the Malaysian PO stockpiles to continue to recover to the pre-pandemic level thanks to the improved estate’s activities since labour shortage has now been 80% resolved. CPO prices to trend lower. In Apr, the local CPO delivery price was essentially stable at RM4,200.00/tonne but averaged monthly higher at RM4,217.50/tonne on distortion on Indonesia’s PO supplies. In addition, the house forecast that average local CPO delivery prices would close lower by -9.0% mom to RM3,837/tonne in May, or decline by -5.1%qoq to RM3,769/tonne in 2QCY23 as a result of the Indonesia government’s decision lifting its export restriction in mid-May in order to reduce glutting stockpiles.

All factors considered, MIDF saya it maintains its NEUTRAL stance on the sector with CPO target price of RM3,500 Mt for CY23. Our top picks for plantation companies are Sime Darby Plant. (TP: RM5.50) and IOI Corp (TP: RM5.40). A key downside risk for CPO price remains: 1) fragile demand outlook on the back inflationary pressure coupled with tight household spending on high base interest rate locally and globally 2) narrowed price discount parity between CPO against SBO averaged which has now averaged at USD24.7Mt (-82.5%mom).