Highlights

• Inventory resumes uptrend… Rising by 7% mom to 1.87m tonnes in Mar-15 (highest since Dec-14), boosted by a strong recovery in production (which jumped by a whopping 33.3% mom).

• Total output jumped 33.3% mom to 1.49m tonnes in Mar- 15, boosted by a recovery in all states. This was boosted by Palm production recovery in East Malaysia, which increased for the first time since Oct-14 (by 26.4% mom to 652k tonnes), as well as continued palm production recovery in the Peninsular region (which increased by 39.1% to 843k tonnes).

• Exports recovered for the first time since Sep-14, by 21.5% mom to 1.18m tonnes in Mar-15, as the absence of festive holidays and lower inventories in China, coupled with India’s importers’ rush to procure palm oil ahead of Apr (in order to avoid Malaysia’s CPO export tax) boosted palm oil demand from major consuming countries, in particularly, China, India and Pakistan.

• Inventory to remain on uptrend in Apr-15. Inventory will likely remain on uptrend in the coming months, as we believe a sustained uptrend in palm output will likely outpace demand growth (which will in turn be capped by the narrow price discount between palm and other competing oils). Cargo Surveyor Intertek Testing Services reported that palm shipments from Malaysia increased by 24% for the first 10 days of Apr.

• YTD, CPO price averaged at RM2,250/mt. We are maintaining our average CPO price assumptions of RM2,300/mt and RM2,400/mt for 2015-2016 for now, pending a further review with downside bias. 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% (see Figure 10).

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 - 13 Apr 2015