Highlights

• Palm oil inventory continued on its uptrend… rising by 17.6% mom to 2.19m tonnes in Apr-15 (higher than Bloomberg survey’s median estimate of 2.09m tonnes), on the back of a 13.3% mom rise in production and a slight 0.6% decline in exports.

• Total output remained on double-digit growth… by 13.3% mom to 1.69m tonnes in Apr-15, and this was boosted by strong production contribution in most states.

• Exports resumed on downtrend… by 0.6% mom to 1.18m tonnes and this was dragged mainly by a 70.6% mom decline in shipment to India. We believe the sharp decline in exports to India will soon normalize in the coming month. Recall, importers in India rushed to aggressively procure palm oil in Mar (which went up by 33.9% to 297k tonnes) in order to avoid Malaysia’s CPO export tax.

• Cargo Surveyor Intertek Testing Services reported that palm shipments from Malaysia increased by 41% to 324.5k tonnes for the first 10 days of May.

• YTD, CPO price averaged at RM2,212/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 - 12 May 2015