Highlights

Inventory recovers on production recovery. Inventory in Mar 14 increased for the first time since Dec 13 (by 1.9% mom to 1.69m tonnes) mainly on the back of output recovery (+17.3% mom) and weaker exports (-8% mom). The stockpile was higher than 1.6m tonnes projected by the median estimates.

Exports declined by 8% mom to 1.24m tonnes, mainly on lower exports to China (-28%), India (-30.2%) and Pakistan (- 55.6%). We believe the weak shipments to the key markets is due mainly to the relatively high palm oil stockpile in China and the reduced price attractiveness of CPO against soybean oil during the month (which in turn deterred price sensitive CPO consumers from buying aggressively). Intertek reported that palm oil shipments from Malaysia rose by 4.4% (mom) to 307k tonnes in the first 10 days of Apr 14.

Total output rose for the first time since Oct 13 (by 17.3% mom) to 1.5m tonnes on the back of a 0.19 tonnes/ha increase in FFB yield (we note that the FFB production typically resumes on an uptrend beginning Mar).

Looking ahead… While the uptrend in CPO output will likely continue, we believe higher CPO exports will likely bring down CPO stockpile in Apr 14 as the recent improvement in the price attractiveness of CPO price (arising from lower CPO price and higher soybean oil price) will likely boost CPO exports in the near term.

YTD, CPO spot averaged at RM2,693/tonne. While the recent rainfall has eased concerns on a serious drought (that may have a negative impact on palm supply), the Australian Bureau of Meteorology has recently raised the possibility of El Niño developing in the coming months. 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. 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 - 11 Apr 2014