Highlights

Singapore proposed Transboundary Haze Pollution Bill. Singapore recently proposed a new law that would hold liable companies or other entities that cause transboundary haze. The draft bill would allow the Singaporean government to levy fines (ranging from S$300k-450k) on companies (either foreign or domestic) that cause transboundary haze which consequently impacts the country.

Possible timeframe for the bill to take effect. If history is a guide, it typically takes 3-6 months for the passage of bill to become an Act of Parliament, and subsequently takes effect.

Impact. Should the bill is passed and implemented, this will likely have an adverse impact on particularly, Singapore players that have exposure in Sumatra Island, Indonesia, as: (1) We believe it may be difficult for the Singaporean government to prosecute those based outside of Singapore (although the bill targets on both domestic and foreign companies); and (2) The Riau province of the Sumatra Island was reportedly to be the worst affected by the recent fires causing haze (see Figure 1).

Recent development aside, while the recent rainfall has somewhat eased concern about a serious drought that may have a lagged impact on palm supply, we note that the Australian Bureau of Meteorology has recently confirmed more signs of El Niño climate pattern forming in the coming months (with the Southern Oscillation Indicator fallen to -13). For now, we are maintaining our average CPO price forecasts for 2014-2015 at RM2,700/tonne, pending more convincing evidence that supports the occurrence of a severe El Niño event.

Maintain our Neutral stance on the sector for now.

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 pick is Genting Plant (BUY; TP: RM12.12).

Source: Hong Leong Investment Bank Research - 2 Apr 2014