Highlights

Inventory level continued to decline. Despite higher production and lower exports, palm oil inventory declined by 11.3% mom to 1.93m tonnes in Apr 13, aided mainly by lower imports (-57.7%) and higher domestic consumption (+87.1%).

Exports declined by 5.6% mom to 1.45m tonnes as higher exports to India (+188.6%) and Netherlands (+6.0%) were more than negated by weaker exports to China (-18.8%) and Pakistan (-37.8%). We suspect the sharp decline in exports to China was due mainly to its higher palm oil stockpile.

Total production rose by 3.1% to 1.37m tonnes, as a 2.3% decline in Sabah’s production was more than mitigated by higher production in Peninsula Malaysia (+7.5%) and Sarawak (+0.5%). We note that the decline in Sabah’s production could be due to its strong production since late-12.

While the inventory level will likely be on the downtrend over the next few months (on the back of Ramadhan season), we believe this is unlikely to spur CPO prices significantly, as peak production cycle (starting Oct) will likely bring inventory level back up. Maintain our average CPO price assumption of RM2,500/tonne (2013) and RM2,600/tonne (2014).

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 slower growth 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.

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: RM3.42)

Source: Hong Leong Investment Bank Research - 13 May 2013