Highlights

• Positive news flows fail to lift price sentiment. Recent positive news flows (including higher biodiesel mandate and subsidies in Indonesia) fail to lift palm oil price sentiment, as the positive news flows were overwhelmed by falling competing edible oil prices (such as soybean oil), whic h has in turn weakened the price competitiveness, hence demand for palm oil. This is witnessed by the reported weak exports figures by both Malaysia and Indonesia (which collectively accounted for 85% of the world’s palm oil supply.

• The negative price sentiment may persist into the near future (which will in turn lead to weaker-than-expected average CPO price for 2015), if the following event(s) happens: 1. A sharp recovery in palm production; 2. Further price weakness in competing vegetable oils (in particularly, soybean oil), hurting demand for palm oil; 3. Weaker-than-expected biodiesel take-up in Indonesia; and/or 4. Indian government raises import duties on palm oil .

• CPO price assumptions maintained for now. While we are cognizant of the downside risk to CPO price, we are maintaining our average CPO price assumptions of RM2,300/mt and RM2,400/mt for 2015-2016 for now, as we continue to monitor the sector’s development . YTD, CPO price averaged at RM2,275/mt, slightly lower than our average CPO price assumption of RM2,300/mt for the year. Based on our estimates, every RM100/mt decline in our average CPO price assumption will bring down plantation companies’ earnings (under HLIB’s coverage) by 2.2-9.9%.

• Neutral stance maintained. Maintain Neutral stance on the sector, with no top pick.

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.

Source: Hong Leong Investment Bank Research - 24 Mar 2015