Highlights

• Despite lower production and improved exports demand, palm oil inventory continued to trend up (rising by 5.5% mom to 2.63m tonnes) in Sep-15 (slightly lower than Bloomberg consensus median estimate of 2.7m tonnes), mainly on higher beginning inventory.

• Production declined by 4.5% mom to 1.96m tonnes, and the decline was led mainly by lower production in the Peninsular Malaysia region, which fell by 8.1% mom (vis-à-vis a flattish mom growth in the East Malaysia region).

• Exports, on the other hand, increased by 4.4% mom to 1.68m tonnes, boosted mainly by a 35.1% mom surge in exports to India (which in turn was due to restocking activities ahead of Diwali festive holidays, in our view).

• While production will likely remain flattish (as production in Peninsular Malaysia may have already peaked, taking cue from the decline in Peninsular Malaysia’s production in Sep- 15), we believe stockpile will likely remain high in Oct -15, due to the absence of festive demand and Golden Week in China (which may in turn drag demand from China). According to cargo surveyor Intertek Testing Services, Malaysia’s palm oil exports for the first 10 days of Oct-15 fell 11.3% mom to 459.4k tonnes.

• We are maintaining our average CPO price forecasts of RM2,300/tonne and RM2,400/tonne for 2015 and 2016 respectively.

• 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 - 13 Oct 2015