Highlights

• Inventory level continued to ease. MPOB reported May-16 palm oil inventory level of 1.65m tonnes (-8.8% mom and -26.5% yoy), in line consensus median forecast of 1.64m tonnes. The mom inventory decline was due mainly to higher exports and domestic consumption, as well as lower imports, which more than offset a 4.9% production growth.

• CPO production increased by 4.9% mom to 1.36m tonnes, driven mainly by a 9.2% increase in production from East Malaysia (which continued to rise for the fourth straight month).

• Exports increased by 9.3% mom to 1.28m tonnes, due to restocking ahead of Ramadhan, and normalization in exports to India (recall, exports to India fell 45% mom in Apr-16). Exports to China, on the other hand, remained weak, and this could be due to rising soybean meal prices, which has in turn resulted in higher soybean crushing (hence soybean oil supply), and the narrowed price spread between the soybean oil and palm oil.

• Inventory level to remain low in Jun-16. We believe exports will likely weaken in Jun-16, on the back of the absence of seasonal demand, and the narrowed price spread between soybean oil and palm oil. Both cargo surveyors (ITS and SGX) reported a 5.9% and 10.3% mom fall in the exports of Malaysian palm oil for the first 10 days of June. Nevertheless, we believe palm oil inventory level will remain low in Jun-16, as an anticipated weaker exports demand will be offset by seasonally lower production (historically, palm oil production was seasonally lower during Ramadhan month). 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.

• Positive – 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 - 13 Jun 2016