Highlights

• Inventory declined for the first time since Jun-14, by 11.5% mom to 2.01m tonnes in Dec -14 (slightly lower than consensus estimate of 2.05m tonnes), mainly on a 22% mom decline in production.

• Total production plummeted by 22% mom to 1.36m tonnes, as floods in Peninsular Malaysia exacerba ted the impact of seasonal decline in output. This is witnessed by a 30.1% mom decline in Peninsular Malaysia’s output, which is more pronounced than the output decline in East Malaysia (where output in Sabah and Sarawak declined by 14-14.1% mom).

• Exports increased for the first time since Sep -14, by 0.4% mom to 1.52m tonnes in Dec-14 on the back of a sharp increase in exports to India (+27.5%), USA (+78.5%) and Pakistan (+28.7%), which altogether more than offset a 24.4% mom decline in exports to China.

• Our expectation for stockpile in Jan… While exports in Jan is seasonally weaker (in particularly China due to winter), we believe stockpile in Jan-15 will remain on a downtrend mainly on the back of floods in the East Coast, which will worsen the seasonal output downtrend. According to Cargo Surveyor Intertek Testing Services, palm oil exports fell by 13% mom to 356k tonnes for the first 10 days of Jan-15.

• Maintain average CPO price projection of RM2,300/tonne for 2015 and RM2,400/tonne for 2016 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 pl anting, 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.

Source: Hong Leong Investment Bank Research - 13 Jan 2015