Highlights

• Although CPO prices were recently lifted by flood in t he East Coast of Malaysia (which in turn may result in lower nearterm palm oil output) and a weakened RM, we are keeping to our less -than-bullish view on the sector’s outlook (as well as maintaining our projected average CPO price of RM2,300/tonne) for 2015, on the back of:
  1. Moderate global economic growth with divergence between the US and other major economies, which will cap demand (and hence prices) for vegetable oils including palm oil;
  2. Palm’s narrow discount against soybean oil will cap demand and prices of palm oil;
  3. Lower crude oil price, which will curb voluntary biodiesel consumption; and
  4. Hig her production cost arising from higher labour and fertiliser costs.

• Thus, we are also maintaining our assumption of RM2,400/mt for 2016, given the unexciting demand outlook. We are maintaining our net profit forecasts as well as target price of companies under coverage.

• Given the less-than-bullish demand outlook for the sector as well as the relative pricey valuations, efficient plantation players with young age profile (which indicates good FFB output growth) will be able to better weather the low CPO price environment.

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 short-term demand and price outlook .Sector View
• Maintain Neutral stance on the sector, given our less -thanbullish sector outlook. For exposure, our top pick is CBIP (Hold; TP: RM2.13)

Source: Hong Leong Investment Bank Research - 9 Jan 2015