Highlights

We are turning slightly more positive on the sector’s demand and price outlook, underpinned by:

1. More synchronized global economic growth, led by the world’s major economies including the US and the Euro zone; and

2. Higher biodiesel mandate from Malaysia and Indonesia.

Demand aside, we also see better clarity from production cost angle, as: (1) The dissolution of Russian-Belarusian potash export cartels since Jul-13 indicates that MOP prices will likely remain low going forward; and (2) The recently announced minimum wage hike for 24 Indonesian provinces in 2014 has put speculations of a steep hike in wages to rest.

Despite our slightly more bullish view on palm oil demand outlook, we believe it is unlikely for palm oil prices to go up significantly higher than current level, given:

1. Biodiesel policy alone is insufficient to boost CPO price higher;

2. Concerns on palm oil output shortfall could be just temporary, growth may resume once weather uncertainties are over; and

3. At current price level, we believe the attractiveness of palm oil has diminished over other oil seeds

We are raising our average CPO price projection for 2014-15 by RM100 to RM2,700/mt, given the slightly better demand outlook.

Post earnings forecasts and target P/E revision (as well as rolling forward our valuation base year from CY2014 to CY2015), our target prices were also revised upwards by 10.6-27.1%. Except for IJMP (which was upgraded to Hold), recommendation for all other stocks remains unchanged.

Catalysts

• Earlier-than-expected recovery in the world’s major economies, resulting in higher edible oil demand and prices;
• Timely implementation of higher biodiesel mandate in Indonesia and Malaysia.
• Weather uncertainties revisit, which would result in supply distortion, hence boosting prices of edible oil.

Risks

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO.
• India imposes higher import duty on CPO.
• Earlier-than-expected recovery in the world’s major economies, resulting in higher edible oil demand and prices.

Rating

NEUTRAL

Positives – (1) Improved demand outlook; and (2) Better production cost visibility.

Negatives – (1) Pricey valuations.

Sector View

Upgraded from Underweight to Neutral. For exposure, our top pick is CBIP (BUY; TP: RM3.75).

Source: Hong Leong Investment Bank Research - 7 Jan 2014