Highlights

• Inventory rose 5.2% mom to 2.28m tonnes in Nov-14 (highest since Dec-12), on the back of weaker exports (-6.1%) and domestic consumption (-22%), which more than offset lower production (-7.5%).

• Exports remain on a downtrend, and declined by 6.1% mom to 1.51m tonnes mainly on the back of lower exports to Netherlands (-16.1%), Pakistan (-42%) and the USA (-40.3%), which altogether more than offset higher exports to China (+45.5%) and India (+2.5%).

• Total output declined by 7.5% mom to 1.75m tonnes. East Malaysia’s output has started on a seasonal downtrend, with a 4.6% mom decline to 879.5k tonnes, while Peninsular Malaysia’s output has declined for the 3 rd consecutive month, with a 10.3% mom fall to 871k tonnes.

• Our expectation for stockpile in Dec… We believe stockpile will start trending down from Dec onwards, on the back of seasonally lower output trend and higher exports (thanks to the zero export tax, which will boost palm oil exports in the near term). According to Cargo Surveyor Intertek Testing Services, palm oil exports climbed 1.7% mom for the first 10 days of Dec.

• We are maintaining our average CPO price projection of RM2,400/tonne for 2014 (YTD: RM2,431/tonne) and RM2,300/tonne for 2015 respectively.

Catalysts

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

Rating

NEUTRAL

Positives

• Long term sector outlook remains favourable

Negatives

• Weak demand and price outlook

Top picks

• None. Despite the recent share price weakness, we reckon that valuations of Malaysian planters remain pricey, given the absence of positive near-term re-rating catalysts. Maintain Neutral stance on the sector.

Source: Hong Leong Investment Bank Research - 11 Dec 2014