Highlights

lower than market expectation of 2.33m tonne as CPO production declined amid lower domestic consumption (-22.0% mom, -32.0% yoy) and slowdown in palm oil exports (-13.8% mom, +7.3% yoy).

• CPO production below market expectation. MPOB reported CPO production of 1.13m tonnes (-19.3% mom, -2.7% yoy) for Jan 16. This is lower than market expectation of1.19m tonnes. CPO production in Feb 16 is expected to be lower mom and yoy due to fewer harvesting days and the Chinese New Year holidays as well as the overlapping impact from previous adverse weather condition and low production season.

• Exports likely to stay weak in Feb 16. According to Intertek, Feb 1-10 exports were down by 22.7% mom to 249,835 tonnes. As India currently has high domestic inventory, exports are likely to stay weak until substantial inventory drawdown has taken place. Meanwhile, exports to China are likely to pick up after the Chinese New Year holidays.

• Inventory drawdown to continue. Inventory level is expected to continue to deplete as production is affected by the prolonged drought in 2015. This would help to support the CPO price movement.

• Further easing of El Nino. According to Australian Bureau of Meteorology, the El Nino event remains strong but continues to decline gradually. Based on the 26 El Niño events since 1900, around 50% have been followed by a neutral year, and 40% have been followed by La Niña. Also, models suggest the neutral state is the most likely for the second half of 2016, followed by La Niña.

Catalysts

• Weather uncertainties revisit, which would result in supply distortion, hence boosting prices of edible oil.

• Severe-than-expected El Nino impact on FFB yield.

Risks

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO.

• Backtracking of biodiesel mandate in Indonesia.

• Imposition of higher import duty on CPO by India.

• Escalating production cost (particularly labour cost).

Rating

NEUTRAL

• We maintain Neutral on the sector with unchanged CPO Price assumption of RM2,400/tonne for 2016.

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)