Highlights

• Inventory level continued to ease. MPOB reported Apr 16 palm oil inventory level of 1.80m tonne (-4.5% mom, -17.5% yoy). This was lower than market expectation of 1.82m tonnes. Decline in inventory level was mainly attributed to lower palm oil imports and better domestic consumption amid better production and weaker exports.

• Weaker than expected CPO production. CPO production increased by 6.7% mom (-23.2% yoy) to 1.30m tonnes but it was below market expectation of 1.33m tonnes. We expect production to continue to rise in coming months but growth is likely to be weaker as compared to 2015 due to El Nino induced drought since last year.

• Palm oil exports to be supported by seasonal demand. Demand for palm oil would improve in the coming months due to the upcoming Ramadan festive season in Jun-Jul 2016. According to Intertek, May 1-10 exports were up by 22% mom to 391,222 tonnes with better demand from EU (+61.9% mom) and India (+72.2% mom). China’s demand, however, remained weak (-28.2% mom).

• 1Q16 results preview. Plantation companies are likely to report weak set of results as the recovery in CPO prices (+11.8% qoq, +6.9% yoy) were offset by the sharp decline in production especially for companies with large exposure in Sabah area. Companies reported double digit qoq decline in FFB production in 1Q16, ranging between -20% to -44%. Among all, IOI reported the sharpest decline in production (-44% qoq, -23.1% yoy). This is followed by GENP (-36.9% qoq, -10.6% yoy) and IJMP (-35.3%, -8.2% yoy). 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

• 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

• CBIP (BUY; TP: RM2.30)

Source: Hong Leong Investment Bank Research - 11 May 2016