Highlights

Inventory declined for the first time since Mar-14, by 10% mom to 1.66m tonnes (~11% below consensus median estimate of 1.84m tonnes), mainly on the back of a 10.2% decline in East Malaysia’s output and a 5.3% increase in exports (which in turn was driven mainly by higher exports to China).

Exports rose by 5.3% mom to 1.48m tonnes, mainly on higher shipments to China (+26.2% mom) and US (+28.3% mom). According to Intertek survey, palm oil shipments advanced by 14.1% mom to 446k tonnes for the first 10 days of July.

Total output declined by 5.3% mom to 1.57m tonnes, dragged mainly by a pronounced decline in output in East Malaysia (where Sabah and Sarawak declined by 10.3% and 9.9% respectively, vis-à-vis 0.7% decline in Peninsular Malaysia).

Since May-14, CPO price declined by 8% to RM2,442/tonne, due mainly to several negative developments recently, including: (1) slower-than-expected biodiesel take-up (in Malaysia and Indonesia); (2) expectation of larger soybean supplies in the US, which has in turn resulted in a 9.5% decline in soybean oil prices since May-14); (3) El Nino will likely be delayed, and it may turn out to be a weak one, if it develops; and (4) a stronger RM.

Looking ahead, we believe stockpile will likely remain flattish in July, as lower output (arising from fasting month, which traditionally slows harvesting activities) will likely be offset by relatively narrow CPO price discount.

YTD, CPO price averaged at RM2,623/tonne, and we are maintaining our average CPO price projection of RM2,700/tonne for 2014-2015.

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

Positives – (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 Jul 2014