Highlights

• Palm oil inventory continued on uptrend, rising by 10% mom to 2.49m tonnes in Aug-15 (slightly higher than consensus median estimate of 2.41m tonnes), mainly on the back of higher production (+13% mom) and a slight decline in exports (-0.3%).

• Production continued on uptrend, increasing by 13% mom to 2.05m tonnes in Aug-15, with East Malaysia region recorded a whopping mom growth of 16% (vis-à-vis a mom growth of 0.5% recorded in the peninsular region).

• Exports declined marginally, by 0.3% mom to 1.61m tonnes in Aug-15, as the strong surge in exports to Pakistan (which could be due to restocking activities ahead of Diwali) was more than negated by weaker exports to China (-32.8%) and India (-24.9%).

• Looking ahead, we believe stockpile will remain high in the coming months, mainly on the back of seasonally higher crop pattern, economy slowdown in China (which will in turn deter vegetable oil consumption, including palm oil. This is also witnessed by the decline in palm oil exports to China YTD). According to cargo surveyor Intertek Testing Services, palm oil exports from Malaysia for the first 10 days of Sept -15 rose by 3.7% mom.

• We are maintaining our average CPO price forecasts of RM2,300/tonne and RM2,400/tonne for 2015 and 2016 respectively, pending further review (with downward bias).

• We maintain our Neutral stance on the sector.

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

• CBIP (BUY; TP: RM2.10)

Source: Hong Leong Investment Bank Research - 11 Sep 2015