Highlights

Inventory in Jan 14 eased by 2.6% mom to 1.93m tonnes (vs. consensus estimate of 1.98m tonnes), mainly on lower output and higher domestic use, which altogether more than offset lower exports.

Exports declined for the 3rd consecutive month (by 9.9% mom to 1.37m tonnes), mainly on lower exports to Malaysia’s two largest export destinations, i.e. China (-15.5%) and India (-12.1%). We attributed the overall slower exports to: (1) Palm’s diminished price attractiveness over soyoil; and (2) Seasonally weaker palm demand during winter season in the Northern Hemisphere. Intertek reported that palm oil shipment gained 4% to 309k tonnes for the first 10 days of Feb 14.

Total output continued to decline (albeit a smaller decline of 9.6% mom vs 10.3% mom in the previous month). The output decline in both Sabah and Sarawak (see Figures 4-7) was more pronounced compared to Peninsular Malaysia.

We believe the positive price catalysts (including better-thanexpected set of data, dry weather that may hurt soybean crop in Brazil, coupled with biodiesel mandate in Indonesia) will likely be negated by: (1) Reduced price attractiveness of palm to soyoil (albeit the price gap has widened slightly since last month); and (2) Seasonal palm oil output recovery (which in turn means more supply going forward), hence limiting upside potential of CPO prices in the near term.

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

We take this opportunity to: (1) Upgrade our call on Genting Plant from Hold to BUY (with unchanged TP of RM12.20) as valuation has become attractive following the recent share price correction; and (2) Downgrade our call on CBIP from Buy to HOLD (with unchanged TP of RM3.75) as upside to our TP is now less than 10% after the recent share price rally.

For exposure in the sector, our top picks are Genting Plant (BUY; TP: RM12.20) and TSH Resources (BUY; TP: RM3.28).

Source: Hong Leong Investment Bank Research - 11 Feb 2014