Highlights

Inventory rises for second consecutive month. Inventory in Apr 14 rose for the second straight month (by 4.6% mom) to 1.77m tonnes, as output growth (+3.9% mom) more than outpaced exports (+1.2% mom). We note the stockpile was 1.7% higher than the consensus median estimate of 1.74m tonnes (and this was mainly due to lower-than-expected exports).

Exports rose for the first time since Oct 13 (by 1.2% mom) to 1.26m tonnes, mainly on higher exports to China (+36.2%), India (+16.7%) and Pakistan (+50.5%).

Total output growth slowed to 3.9% mom (from 17.3% mom in Mar 13), with the East Malaysian estates recorded an aggregate growth of 4.1% mom (vs. 3.8% mom recorded by the estates in Peninsular Malaysia). Seasonality aside, we believe the 2nd consecutive monthly rise in FFB output was also helped by the improved rainfall since mid-Mar.

Looking ahead… We believe palm oil stockpile will likely stay flat (if not reducing slightly) in May 14, as the uptrend in CPO output (which will likely continue in May, although at a slower pace according to historical trend) will be curbed by: (1) seasonal restocking ahead of the Ramadhan month (which will begin by end-Jun); and (2) the recent improvement in the price attractiveness of CPO price against soyoil. The higher demand in May is evidenced by the recent shipment data by the Intertek, which reported that palm oil shipments from Malaysia increased by 28% mom to 392k tonnes for the 1st 10 days of May.

The Australian Bureau of Meteorology has recently raised the likelihood of an El Niño event occurring by as early as July to 70%. Average CPO price forecast for 2014-2015 maintained at RM2,700/tonne for now, 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- 14 May 2014