Highlights

Inventory rises for third consecutive month in May 14 (by 4.2% mom to 1.84m tonnes), as higher exports (+10.7% mom) were more than offset by higher output (+6.5% mom) and lower domestic consumption (-9.3% mom).

Exports increased by 10.7% mom to 1.4m tonnes, on higher shipments to India (+60.3%), Netherlands (+110.6%), Pakistan (+13.8%) and USA (+16%), which more than offset a 12.8% mom decline in exports to China. According to Intertek survey, palm oil shipments fell by 0.3% mom to 392k tonnes for the first 10 days of June.

Total output growth picked up by 6.5% mom (from 3.9% mom in Apr 14), with Peninsular Malaysia recording an output growth of 7.6% mom (vs. a 5.4% mom growth recorded by the East Malaysian estates).

Update on potential El Niño event. According to the Australian Bureau of Meteorology, the conditions for an El Niño developing have eased (although there is still a 70% chance that it will happen), as several surveyed climate models have recently eased their predictions slightly.

Looking ahead… We believe palm oil stockpile will likely increase slightly from May’s level, as: (1) CPO output will likely remain on the uptrend (albeit at a slower pace); and (2) seasonal restocking may have ended by May (which means demand will begin normalizing from June).

Our average CPO price projection of RM2,700/tonne for 2014-2015 remains unchanged for now (vs. YTD average of RM2,656/tonne and current spot price of RM2,408/tonne), pending further confirmation on the weather uncertainties (El Niño).

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: RM12.16).

Source:Hong Leong Investment Bank Research - 11 Jun 2014