UOB Kay Hian analysts Leow Huey Chuen and Jacquelyn Yow are maintaining their “market weight” rating on the plantation sector, expecting it to be less volatile in 2023 compared to last year.

In their Jan 5 report, the analysts expect the global vegetable oil market to move from undersupply to a supply and demand balance in 1HFY2023. This is on the assumptions of higher production of palm oil and other soft oils as well as strong demand that is well supported by higher biodiesel blending.

The analysts highlight that 2022 was an extreme year for the palm oil market, which saw the largest price differential of RM4,787 ($1,470) per tonne from the peak in March last year of RM8,076 per tonne to the low of RM3,289 per tonne in September last year.

The volatile CPO prices in 2022 were driven by the Russo Ukrainian war — which led to a sudden spike in the prices of commodities; Indonesia’s export control policies which shocked the market; as well as disappointing palm oil production due to three consecutive years of La Niña and the labour shortage in Malaysia.

For 2023, the analysts estimate CPO average selling price (ASP) to be at RM4,000 per tonne. This is 21% lower y-o-y, but is still the third highest CPO ASP in history, they note.

“In 2023, prices are set to stay elevated despite higher production as demand is expected to post higher growth due to Indonesia’s higher biodiesel blending. We expect global palm oil demand to grow 7.2% versus supply growth of 3.8% for 2023. Thus, the stock-to-usage ratio is expected to remain stable at 14.8%, which remains supportive of CPO prices,” they add.

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The key risks to the analysts’ current forecast include weather uncertainty with the possibility of El Niño, the ongoing war in Ukraine and rising non-trade barrier policies to protect domestic production and food security.

“The plantation sector’s share price performance is highly correlated with the CPO price trend. As we expect CPO prices to stay within the current trading band of RM3,500-RM4,500 per tonne, it is tough for the sector to outperform the market.

“However, after two consecutive years of strong earnings and good cash flow, most of the plantation companies have pared down their debts and are amassing cash with the potential to maintain or increase their dividend payouts,” the analysts say.

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Leow and Yow’s top picks include Wilmar International. They highlight that although Wilmar’s 2023 earnings may be lower than that in 2022, its integrated business model enables the company to extract the best value from its business value chain.

The analysts has a “buy” call on Wilmar with a sum-of-the-parts-based target price of $5.50, which is derived by pegging a 2023 PE of 17x for the China operations and a blended 11x PE for the non-China operations. The target price translates to a blended 2023 PE of 15.3x.

As at 11.35am, shares in Wilmar are trading 2 cents higher or 0.48% up at $4.16.

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