Highlights

• We raise our 2027 CPO price assumption to RM4,700/tonne from RM4,400, as El Niño-induced dryness should strain production while Indonesia’s B50 mandate would limit the country’s exportable supply.
   
• We increase our 2027 net profit forecasts for Bumitama (BAL) by 9.6% and 12.1% for First Resources (FR). Indonesian producers keep less of each ringgit of price upside than Malaysian peers, as the export levy rises with the reference price.
   
• We raise our target prices for BAL to S$2.54 (from S$2.15) and FR to S$5.09 (from S$4.57), and maintain BUY on both. BAL remains our top pick as it has the purest upstream exposure, with 21% upside to its share price.
   
• Maintain OVERWEIGHT on the sector.

Analysis

• Indonesian supply is holding up for now. The Indonesian Palm Oil Association's (GAPKI) July data put production at 5.37m tonnes, up 1.9% mom, taking January-July output to 35.65m tonnes, up 6.4% yoy. Ending stocks stood at 2.76m tonnes, 7.4% higher than a year earlier. The squeeze will come in 2027 - we expect Indonesian output to fall 3.0% to 52.87m tonnes as the El Niño rainfall deficit feeds through to the harvest.
   
• B50 to limit Indonesia’s exportable supply of CPO. Biodiesel absorbed 7.86m tonnes of palm oil in January-July, up 8.6% yoy, with July's 1.29m tonnes being the highest monthly figure this year. Total domestic consumption rose 6.4% yoy to 15.22m tonnes, well ahead of exports at +2.9%. With the 50% biodiesel mandate reaching full pump coverage on 1 October, we expect Indonesian exports to fall 10.6% to 22.99m tonnes in 2027.
   
• Indonesian growers keep less of the upside. Indonesia's export levy rises with the CPO reference price, so part of any price gain is deducted before it reaches growers. Our RM300/tonne upgrade is worth about US$70/tonne, and we raise our 2027 levy assumptions by 10% of that increase, to US$251/tonne for BAL and US$172/tonne for FR. The higher levy takes about 2ppt off each company's 2027 earnings upgrade.
   
• El Niño trims the 2027 crop. We now assume own fresh fruit bunch (FFB) output falls 1.0% yoy in 2027 for both companies, from +2.5% previously for BAL and flat for FR. For BAL, we maintain our previous forecast for bought-in fruit volumes, so its 2027 CPO output is 2.1% below our earlier estimate. Our 2028 FFB growth assumptions are unchanged, as the lower 2027 base carries into 2028.
   
• Earnings estimates. We raise our 2027 net profit forecasts by 9.6% for BAL and 12.1% for FR. The higher CPO price alone adds 15-20% to the companies’ 2027 earnings, before the negative impact of the higher export levy (-1.6ppt to -2.4ppt) and the smaller FFB output (-1.6ppt to -7.5ppt) are taken into account.