Highlights

• MPOB’s palm oil inventory rose for the 3 rd consecutive month … by 5.2% mom to 1.66m tonnes, as higher imports and lower exports more than offset lower output. Against Bloomberg consensus, the stockpile came in lower than consensus median estimate of 1.7m tonnes.

• Output declined for the 2 nd consecutive month… by 6.1% mom to 1.57m tonnes, mainly on the back of a 9.3% mom decline in East Malaysia (while Peninsular Malaysia registered a less pronounced decline of 3.1%). YTD, output declined by 14.6% to 15.8m tonnes.

• Exports declined by 4.2% mom to 1.37m tonnes mainly on lower exports to India and the EU (which registered mom decline of 35.6% and 28.2% respectively). We note that exports to India fell to the lowest since Apr-15, and the sharp decline was due partly to the recent demonetization of Indian rupee (since Nov-16), which has resulted in shipments to India being delayed and/or cancelled.

• Moving into the following month (i.e. Dec-16)… Stockpile will likely rise further in Dec-16, as seasonally lower palm production will likely be offset by weak exports arising from current high palm oil prices (which caps demand for palm oil), seasonally weaker exports to certain major palm oil consuming countries (on the back of winter season), and the recent demonetization of Indian rupee (which may continue to weigh on the country’s palm oil demand). Despite having anticipated higher stockpile, palm oil prices will likely be supported at a high level, underpinned by the weaker-than expected production data.

Catalysts

• Revisit of weather uncertainties, which would result in supply distortion, hence boosting prices of edible oil.

• Severe-than-expected El Nino impact on FFB yield.

Risks

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO.

• Backtracking of biodiesel mandate in Indonesia.

• Imposition of higher import duty on CPO by India.

• Escalating production cost (particularly labour cost).

Rating

NEUTRAL (↔)

• We maintain our Neutral rating on the sector with unchanged CPO Price assumptions of RM2,400/tonne and RM2,500/tonne for 2016 and 2017 respectively.

Top picks

• For exposure, our top picks for the sector are Sime Darby (BUY; TP: RM8.82) , Hap Seng Plantations (BUY; TP: RM2.74) and CBIP (BUY; TP: RM2.41) .

Source: Hong Leong Investment Bank Research - 15 Dec 2016