Highlights 

Higher  biodiesel  mandate  from   Nov-14.  In  a  move  to reduce  palm  oil  stockpiles   (and  reducing  dependence  on petroleum  diesel),  the  Government  will  implement  higher biodiesel  mandate  (from B5 to B7) in Peninsular Malaysia and East Malaysia from Nov -14  and Dec-14  respectively.

The  government  is  also  studying  the  possibility  of  raising  the biodiesel  mandate  further  to  B10  (no  mention  on  timeline  for implementation  for now).

Pros/Cons

The  latest  development  is positive to the sector, as the higher biodiesel  mandate  bodes  well  for  palm  oil  consumption, hence supporting  palm oil prices .

Based  on  our  estimates,  the implementation of B7 nationwide will  boost  biodiesel  consumption  in  Malaysia  to  448k  mt  p.a. (from  155k  mt  in  2013,  as  reported  by  USDA),  assuming  the country’s  subsidized  trans port  sector  consumes  6.4m  mt  of diesel  a  year.  The  additional  biodiesel  consumption  will  then ease  palm  oil  stockpile  inn  Malaysia  by  14%, based on Sep-14’s stockpile of 2.09m mt.

While  the  government’s  recent  moves  (i.e.  raising  biodiesel mandate  and  extending  CPO  export  duty  exemption)  are positive  to  the  sector,  we  continue  to  hold  the  view  that  it  is unlikely  for  CPO  price  to  recover  significantly  higher  from current  level,  given:  (1)  CPO’s  narrow  discount  against  the soy  oil;  and  (2)  the  economic  viability  of  voluntary  biodiesel demand  given  current low crude  oil price.

Catalysts 

• I mplementation  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
• Escalating production  cost (in particularly, labour  cost)

Rating

NEUTRAL

• Positive  –  Long term sector outlook remains favourable
• Negatives  – Weak demand  and price outlook

Sector View

• Maintain  average  CPO  price  projections  of  RM2,400/mt  and RM2,300/mt  for  2014  and  2015  respectively,  as  well  as  our Neutral  stance on the sector.
• For exposure, our top pick is IJM Plant (Hold; TP: RM3.52).

Source: Hong Leong Investment Bank Research - 29 Oct 2014