Highlights

Lowest inventory level since Sep 12. Palm oil inventory declined by 10.9% mom to 2.17m tonnes in Mar 13 (lower than consensus median forecast of 2.27m tonnes), mainly on a 10% mom increase in exports which more than offset a 2.2% mom increase in production. On a yoy basis, palm oil inventory rose by 11.2% mainly on higher beginning inventory (+18.3%) and production (+9.4%), which altogether more than offset a 15.7% increase in exports.

Exports boosted by stronger Chinese demand. Exports climbed by 10% mom to 1.54m tonnes in Mar 13, boosted mainly by a whopping 76.7% increase in exports to China.

Production growth picks up in Mar 13. Production rose by 2.2% mom to 1.33m tonnes, on higher production from both Peninsula Malaysia (+2.7%) and East Malaysia (Sabah: +1.8%; Sarawak: +1.5%).

Despite the reduction in inventory, we are keeping our average CPO price forecast of RM2,800/mt for 2013 and 2014 for now and will only revisit towards mid-13, pending for more certainties on FFB output and exports demand.

Our Underweight stance on the sector maintained on: (1) Higher palm oil production in 2013; (2) Demand risk remains on the back of uncertainties in the EU and stricter quality control on edible oil imports in China; (3) The wide CPO price discount against the soybean oil will unlikely benefit CPO consumption (and hence price) as we believe higher soybean crop from South America will narrow CPO’s price discount against the soybean oil; and (4) The sector’s expensive valuations relative to CPO price. For exposure in the sector, our top pick is CBIP (BUY; TP: RM3.41). Catalysts (downside)

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

India imposes import tax on CPO.

Longer-than-expected CPO price recovery path.

Risks

• Earlier-than-expected recovery in the world’s major economies, resulting in higher edible oil demand and prices;
• Weather uncertainties revisit, which would result in supply distortion, hence boosting prices of edible oil; and
• Further action from the Malaysian Government to boost competitiveness of downstream plantation players.

Rating

UNDERWEIGHT

• Negatives – (1) Weak global economic outlook; and (2) Impending excess supply of CPO.
• Positive – CPO is still relatively cheaper than soybean oil.

Top picks

• CBIP (BUY; TP: RM3.41)

Source: Hong Leong Investment Bank Research - 11 Apr 2013