Highlights

• Potential La Nina event. According to Australian Bureau of Meteorology, El Nino effect is fading with 50% likelihood of La Nina occurring in later 2016. This coincides with a report by National Oceanic and Atmospheric Administration confirming a weakening El Nino and close to 50% probability of La Nina condition developing by fall. La Nina will bring less rain to the US and South America, and more rain for Asia; o Heavy rainfall could affect palm oil production in the immediate term as it might slow down the harvesting progress and cause delay in transportation due to flooding. Also, it could affect pollination and photosynthesis of oil palm trees as well as FFB production six months after heavy rainfall. o La Nina event usually has greater impact on soybean production in US and South America. As both soybean oil and CPO prices are positive correlated, lower soybean production will boost soybean oil price, causing a spillover effect to CPO price.

• CPO price to remain high in 2Q16. We believe that CPO price would continue to be supported by weak production in 1H16 before a recovery in 2H16. During the Programme Advisory Committee Seminar 2016 (PAC 2016) organized by Malaysia Palm Oil Board, Mr Thomas Mielke from Oil World expected CPO price to reach RM2,800-3,000/tonne in the next 1-2 months and could possibly go beyond RM3,000/tonne depending on production growth.

• Biodiesel mandates might not meet target. While Mr Thomas Mielke expected better biodiesel production from Indonesia of 2.4m tonnes, up from 1.4m tonnes last year, it is still lower than the targeted level. On the hand, Malaysia might not able to fulfill its B10 due to the high premium to gas oil. He expected Malaysia to meet half of B10 biodiesel mandate (0.5m tonnes in 2016).

• Moratorium on new Indonesia palm plantation. According to Bloomberg, Indonesia government is planning a moratorium on new concession for palm oil plantations to protect the environment. We believe the impact of this moratorium is minimal as there is already a moratorium on new permits for developing natural forests until 2017. In

Catalysts

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

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

Risks

• 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

• CBIP (BUY; TP: RM2.30)

Source: Hong Leong Investment Bank Research - 15 Apr 2016