Highlights

Inventory in Dec 13 grew for the 4th straight month (by 0.3% mom) to 1.99m tonnes as lower domestic consumption and exports more than offset a 10.4% decline in output.

Exports continued to decline for the 2nd consecutive month by 1.4% mom to 1.51m tonnes mainly on lower exports to India (-32.8%) and Netherlands (-10.2%), which altogether more than offset higher exports to China (+14%), Pakistan (+3.5%) and USA (+1.5%). We believe the lower exports to India were due to Indian importers’ temporary switching to refined palm oil (from CPO) ahead of higher import tax on refined edible oils (a move to protect local oilseed growers and refiners in India). The recent upward revision in import tax on refined edible oil will likely switch Indian importers’ demand back to CPO from Malaysia, given the lower CPO export duty in Malaysia against Indonesia. Intertek reported that palm oil shipments for the first 10 days of Jan 13 declined by 21% mom to 297k tonnes.

Total output declined by 10.4% mom to 1.67m tonnes, with Peninsular Malaysia registering more pronounced decline (- 15%) relative to Sabah and Sarawak (which registered a mom decline of 2.9% and 9.6% respectively).

While the current high Brent crude price augurs well for the biodiesel sector, we believe this will likely be negated by the diminished price attractiveness of palm oil against other oilseeds including soyoil. We note that CPO’s price discount against the soyoil has narrowed to US$69/tonne from >US$100/tonne since late-Nov 13 vs. historical mean of US$156/tonne.

Average CPO price projection for 2014-15 maintained at RM2,700/tonne. Maintain our Neutral rating on the sector.

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.

Rating

NEUTRAL

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

Negatives – (1) Price attractive of CPO diminishes; and (2) Pricey valuations for the sector.

Top picks

For exposure in the sector, our top picks are CBIP (BUY; TP: RM3.75) and TSH Resources (HOLD; TP: RM3.28).

Source: Hong Leong Investment Bank Research - 13 Jan 2014