Highlights

• Aug-16 stockpile – lowest since Jan-11… MPOB’s palm oil stockpile fell by 17.3% mom to 1.46m tonnes in Aug-16 (below consensus median estimate of 1.63m tonnes), as higher output was more than mitigated by a surge in exports (driven mainly by restocking activities ahead of festive seasons).

• Production inched up for the 6th consecutive month… By 7.3% mom to 1.7m tonnes, with bulk of the increase coming from East Malaysia. On yoy basis, we note that production remained on downtrend, as a result of 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 for the 2nd consecutive month… By 30.9% mom to 1.81m tonnes, due to restocking activities ahead of mid-autumn festival and Diwali celebrations, evidenced by 41.7% and 125.8% mom increases in exports to China and India. Moving into the following month, exports will likely weaken, due to the absence of major festivities that push demand for palm oil and the diminished price competitiveness of palm oil over soyoil (see Figure 4), which curbs demand for palm oil. According to Cargo surveyor ITS, palm oil shipment from Malaysia fell 17% mom for the first 10 days of Sep-16.

• 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 - 14 Sep 2016