Breaking the Record in Third Quarter
Looking Forward to Significant Growth in FY21E
• LSIP has managed to increased higher CPO sales volume 250,000 tons or +13% YoY in 9M21. AALI's CPO sales volume increased +18.2% YoY reaching 410,000 tons in 9M21. Meanwhile, DSNG recorded a lower CPO sales volume of 412,536 tons, decreased -4.83% YoY in 9M21 (vs 433,455 tons in 9M20).
• We note that higher sales volume coupled with higher ASP leads the topline of our universe to grow significantly 20% - 30% in FY21E.
CPO Outlook 2022: The Price is Already Spike Up, Will The Demand Decrease?
• CPO price is currently at the level of RM4,993/ton or increasing +30.81% YoY / +6.30% YTD due to an increase in CPO demand towards the end of the year and production supply being hampered by the impact of La Nina which will last until the end of the year 1Q22. BMKG estimates that La Nina will last until the end of February 2022. We estimate that CPO price next year will be around RM3,580 – RM4,700 with a potential increase until early 2Q22 and will stabilize at lower levels in 3Q22, although still above pre-pandemic levels. • Malaysia will likely relax cross – border restrictions on foreign workers in 2H22, a move that will ease the severe labour crunch in CPO plantation that contributed to a price rally.
• We note that Malaysia is the second – largest exporter to China with 1.18 mn tons up to 8M21. Meanwhile, Indonesia became the largest exporter, which reached 4.43 mn tons up to 8M21, ~35,93% of Indonesia’s total CPO exports.
• We see domestic demand for palm oil is still quite high in early 1H22 driven by the biodiesel sector which is estimated to increase by 10% - 16% YoY in FY22E and local food demand is estimated to increase by 3.5% - 4.6% YoY. On the other hand, the risk of looking for lower global CPO FY22E is a major concern due to competition with soybean oil which has lower prices and high CPO production costs due to rising fertilizer prices.
CPO Downstream as the Focus of Indonesia’s Government
The government emphasizes the importance of downstreaming of palm oil to increase the added value of exports. Until September-21, Indonesia's total palm oil production reached 38.14 million tons. From the total production, Indonesia's palm oil exports until September 2021 reached 25.67 million tons, 76% was in the form of processed palm oil. If the downstreaming of CPO can be carried out, it will benefit CPO producers by increasing the selling value, plus the palm oil trade cooperation between Indonesia and EFTA has the potential to increase CPO exports in upcoming years.
OVERWEIGHT Outlook with Top picks: AALI IJ, LSIP IJ and DSNG IJ
OVERWEIGHT outlook for the plantation sector and our top picks are: 1) AALI (BUY TP: IDR14,350) supported by higher domestic demand, higher sales on derivatif product and rising on CPO Price; 2) LSIP (BUY TP: IDR1,620) with a strong cash position and attractive valuation; and 3) DSNG (BUY TP: IDR800) as the leader in CPO ESG stocks and will benefit from increased CPO demand. We consider that the CPO price rally will tend to be limited. On the other hand, we believe CPO demand is still growing at least until 1H22.
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