KUALA LUMPUR, March 11 — Further increase in selling prices of consumer staples due to Russia-Ukraine war will likely be gradual and only happen in the second half of 2022 forecast to ensure products remain affordable, CGS-CIMB Securities Sdn Bhd said.

It said among the consumer staple names, Nestle, F&N, Power Root and Kawan Food have the biggest exposures to rising commodity prices.

“Nevertheless, we believe they have the pricing power (albeit with a certain time lag) as long-term demand for consumer staples goods — essentially daily necessities — is generally inelastic,” it said in a note.

It said raw materials for the consumer staples companies such as wheat (+56 per cent year-to-date - YTD), palm oil (+37 per cent YTD), corn (+25 per cent YTD), and soybean (+25 per cent YTD).

According to the United States Department of Agriculture (USDA), Russia and Ukraine combined account for 78 per cent /29 per cent/19 per cent of the estimated 2021/22 global trade in sunflower oil/wheat/corn, respectively.  

The brokerage thinks that investors should look for discretionary names with high gross profit margins and minimal exposure to commodity prices; BFood, Bonia and InNature.

It maintains “overweight” call on the sector.

On agribusiness, it projects palm oil stocks to rise by 4.6 per cent month-on-month (m-o-m) to 1.59 million tonnes by end-March 2022F, with output and exports rising by 15 per cent and 6.0 per cent m-o-m, respectively.

“We predict CPO prices to trade at a wide range of RM6,000-7,500 per tonne in March 2022F due to uncertainties over the availability of sunflower oil/crops from Russia and Ukraine, as well as Indonesia’s decision to increase its Domestic Market Obligation (DMO) percentage to 30 per cent, up 10 per cent from the previous mandate effective March 10, 2022.

“This means Indonesian exporters will now be required to sell 30 per cent of their planned exports of CPO and palm olein domestically at the price set by the government of Rp9,300 per kg for CPO (which is at 48 per cent below market price for CPO in Indonesia of Rp18,000 per kg as at March 9, 2022),” it said.

Indonesia’s move to further restrict exports of palm oil will tighten the availability of palm oil in the export market as exporters may need time to fulfill the new export ruling which we gathered had caught the industry by surprise.

This could keep prices high at the current level of RM7,410 per tonne until the Aidilfitri festival in May in the short term before trending lower in 2H22, it said.

CGS-CIMB maintains a “neutral” rating with key picks — KLK, GENP and HSPlant. — Bernama