Highlights

Inventory increased marginally by 1.5% mom to 1.68m tonnes in Jul-14 (higher than consensus median estimate of 1.6m tonnes), mainly on the back of a 6.1% rise in output and 2.3% decline in exports.

Exports declined by 2.3% mom to 1.45m tonnes, dragged mainly by lower exports to China (-28.8%), Netherlands (- 12.3%) and the USA (-24.5%). According to Intertek survey, palm oil shipments declined by 22% mom to 247k tonnes for the first 10 days of Aug.

Total output recovered from previous month’s fall, with a growth of 6.1% to 1.67m tonnes, boosted mainly by a pronounced recovery in Peninsular Malaysia (which rose by 8%, vis-à-vis a 3.9% increase in the East Malaysia).

Looking ahead, we believe CPO stockpile in Aug will likely climb further from Jul’s level, mainly on the back of CPO output recovery (arising from better harvesting activities, as Ramadhan ended in end-Jul) and the narrow CPO price discount against soybean oil.

YTD, CPO price averaged at RM2,590/tonne, and we are maintaining our average CPO price projection of RM2,700/tonne for 2014-2015, pending review with downward bias.

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 - 12 Aug 2014