Highlights

• MPOB’s palm oil inventory rose 5.7% mom to 1.55m tonnes in Sep-16 (slightly higher than consensus median estimate of 1.51m tonnes), driven mainly by a sharp decline in exports amid flattish output (which grew by 0.8% mom).

• Output rose for the 7th consecutive month… But growth slowed to 0.8% mom (from 7.3% in previous month), with higher output from Peninsular Malaysia (+2.7% mom) more than offset a 1.1% mom decline in output 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 weakened mom… By 20.4% to 1.45m tonnes in Sep-16, with exports to India, China and EU declining by 40.3%, 33.9% and 27.1% mom, as festive demand and price competitiveness of palm oil (vs. soyoil) waned.

• Moving into the following month (i.e. Oct-16)… While the recent resumption of rapeseed oil reserves sales may result in lower palm oil exports to China, we believe potentially lower palm exports to China will be mitigated by widened palm’s discount against the soyoil (see Figure 4) and the Indian government’s recent move to lower import duties for palm oil. Cargo surveyor ITS indicated that palm oil shipment from Malaysia rose 10.8% mom for the first 10 days of Oct-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: RM2.41)

Source: Hong Leong Investment Bank Research - 11 Oct 2016