Highlights

• Inventory level stood at 2.63m tonnes for Dec 15. It declined for the first time by 9.5% mom since Jun 15. This was lower than market expectation of 2.76m tonne as CPO production declined amid higher domestic consumption (+36.2% mom, +40.8% yoy). Palm oil exports was down marginally by 1.1% mom (-2.4% yoy).

• 2015 CPO production was up 1.5% yoy to 19.96m tonnes. The better production growth in Peninsula Malaysia and Sarawak of 3.6% and 7.6% yoy respectively was partly offset by weaker Sabah’s CPO production (-5.5% yoy), affected by the dry weather in 1H15. Going into 1Q16, CPO production is likely to stay weak due to seasonal factor and lagged impact from the prolonged drought in 2015.

• Exports were flattish in 2015 with increase in palm oil exports to India (+13.6% yoy) offset by the slowdown in shipments to China, Pakistan and USA. According to Societe Generale de Surveillance, Jan 1-10 exports rose by 7.9% mom to 322,081 tonnes, mainly due to better demand from China and India. However, we remain cautious on the sustainability of demand given the high inventory level in the respective countries as well as economic slowdown in China.

• Inventory drawdown to continue in 1Q16. Inventory level is expected to continue to deplete as demand picks up while production stays weak due to prolonged drought in 2015. This would help to support the CPO price movement.

• MPOB reported CPO ASP of RM2,154/tonne (-9.6% yoy) for 2015, below with our expectation of RM2,300/tonne. However, we are likely to see recovery in CPO prices due to the tightness in supply and better demand from Indonesia’s biodiesel mandate. However, the upside is expected to be capped by high soybean supply and low crude oil. We expect an average CPO price RM2,400/tonne for 2016.

Catalysts

• Better than expected take up rate of biodiesel demand in Malaysia and Indonesia.

• 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.
• Imposition of higher import duty on CPO by India.
• Escalating production cost (particularly labour cost).

Rating

NEUTRAL

Positives

• Long term sector outlook remains favourable.

Negatives

• Weak demand and high inventory in near term.

Top picks

• Genting Plantation (BUY; TP: RM11.75)
• CBIP (BUY; TP: RM2.30)

Source: Hong Leong Investment Bank Research - 12 Jan 2016