Highlights

• MPOB’s palm oil stockpile declined marginally… By 0.2% mom to 1.77m tonnes in Jul-16, as higher output was offset by higher exports (which in turn were buoyed mainly by restocking activities ahead of mid-autumn festival in China).

• Production inched up for the 5th consecutive month… By 3.5% mom to 1.59m tonnes, with bulk of the increase coming from East Malaysia. While production remained lower on yoy basis (by 12.7%), we note the yoy decline in Jul-16 has eased further (from 24.6% in May-16 and 13.1% in Jun-16). This could be explained by the onset of El Nino since last year, which has in turn resulted in weaker palm production in 2016 as well as the shift in cropping pattern.

• Exports jumped 21.2% mom to 1.38m tonnes… Driven mainly by restocking activities ahead of mid-autumn festive, which has resulted in exports to China more than doubling to 211k tonnes (from 101k tonnes in the previous month). Exports to other key destinations also increased (particularly, to India, EU and USA). We suspect this was due to the low CPO prices during Jul-16, which has in turn boosted CPO sales. Cargo surveyor Intertek Testing Services (ITS) reported that palm oil shipment for the first 10 days of Aug rose 17.8% to 456k tonnes.

• Update on La Niña… While La Niña may still develop, both weather forecasters (Australian Bureau of Meteorology and National Oceanic and Atmospheric Administration) suggest that the intensity will likely be weak, if it happens.

• Maintain our Neutral stance on the sector, 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 - 11 Aug 2016