Highlights

• MPOB’s palm oil stockpile rose for the first time in 6 months by 7.7% mom to 1.78m tonnes in Jun-16 (higher than consensus median forecast of 1.72m tonnes), mainly on higher output (which increased for the 4th straight month, by 1.53m tonnes) and lower exports (which declined by 11.7% mom to 1.13m tonnes).

• The mom decline in exports was due mainly to lower exports to China (-5%), India (-48.7%) and USA (-48.8%) but partly mitigated by higher exports to the EU (+29%) and Pakistan (+15.5%).

• Inventory to inch higher in Jul-16. We believe inventory will inch higher in Jul-16, taking cue from Jun-16’s production figure (indicating that “mini peak” has begun early and will sustain into the following month, if history repeats), and exports will likely remain weak (in the absence of seasonal demand and narrowed price spread between soybean oil and palm oil).

• CPO futures price has fallen by ~RM400 to RM2,204/tonne since early-Jun, due to potentially higher soybean and corn output in the US arising from improved weather condition and an upward revision in soybean and corn planted areas, which dragged soybean prices down, hence spilling over to CPO prices. While our expectation of higher palm output and weak exports in the coming months do not bode well for near-term CPO prices, the Australian Bureau of Meteorology forecasts that La Niña remains possible in 2016 (with 50% chance). Depending on its intensity, the onset of La Niña, if materializes, would have an adverse impact on palm oil output, hence lending support to palm oil prices.

• Maintain our Neutral stance, with projected average CPO price of RM2,400/tonne and RM2,500/tonne for 2016 and 2017 respectively. 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 Jul 2016