Highlights

Speakers were generally bullish on their palm oil 2014 price outlook, underpinned by 2 major factors, namely: (1) The weather uncertainties; and (2) Biodiesel mandate. Out of the 7 speakers, 6 were bullish on 2014 palm oil price.

Tan Sri Datuk Dr Basiron remains bullish on palm oil demand and price (with CPO price forecast of RM2,600- 3,000/tonne in 2014).

Mr Thomas Mielke believes that CPO price could exceed US$1,000/tonne in the next 4-6 weeks, should the weather stay dry for another 2-3 weeks.

Dr James Fry believes that current market anticipations will bring CPO prices to just above RM3,000/tonne in mid-2014. Beyond which, will result in edible oil importers switching to sun, soy and canola oils, hence capping further upside to palm oil price at RM3,000/tonne.

Mr Dorab Mistry believes that CPO futures will need to rise to RM3,000/tonne in the near term, in order to control demand and allow palm inventory level in Malaysia and Indonesia to maintain at a “workable level”. Should El Nino return, CPO price could rise to RM3,500/tonne, which would then affect biodiesel demand (both discretionary and mandatory).

We are keeping to our average CPO price projection of RM2,700/tonne in 2014-2015 for now, pending more convincing evidence that supports the potential El Nino event.

We believe the current bullish undertone will result in nearterm CPO price overshooting on the upside in the near term, which in turn provides trading opportunities for CPO stocks. As such, we believe focus should be on plantation stocks with higher liquidity.

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

• Demand risk from major palm oil consuming countries;
• Demand destruction from price sensitive palm oil consuming countries;
• Sharper-than-expected rise in production cost; and
• Expansion/operational risk.

Rating

NEUTRAL

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

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

Sector View

For longer term exposure, our top picks are Genting Plantations (BUY; TP: RM12.12) and TSH Resources (T.BUY; TP: RM3.12).

Source: Hong Leong Investment Bank Research - 6 Mar 2014