Highlights

• MPOB’s palm oil inventory rose 5.6% mom to 1.55m tonnes in Oct-16, as lower net exports more than offset a decline in production. Against Bloomberg consensus, the stockpile came in lower than consensus median estimate of 1.67m tonnes).

• Output declined for the first time in 7 months… By 2.2% to 1.68m tonnes, led mainly by a lower output in East Malaysia and Perak.

• Exports declined for the second consecutive quarter (albeit at a much subdued pace of 1.4% mom, vs. 20.4% decline in previous month) to 1.43m tonnes, on the back of lower exports to China (-5.2%, could be due to the release of rapeseed reserves), India (-22.3%, due to weaker replenishing activities post Diwali) and the US (-10.1%).
• The latest data is positive for palm oil prices… As lower output and relatively stable exports demand will likely lend support to near term palm oil prices.
• Moving into the following month (i.e. Nov-16)… We believe stockpile will likely remain low, driven by sustained demand from India (arising from its recent move to lower import duties for palm oil) and sustained palm’s discount against the soyoil (at above US$100/tonne, see Figure 4), as well as seasonally low palm oil production. Cargo surveyor ITS indicated that palm oil shipment from Malaysia declined 15.7% mom for the first 10 days of Nov-16.

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 assumptions of RM2,400/tonne and RM2,500/tonne for 2016 and 2017 respectively.

Top picks

• For exposure, our top picks for the sector are Sime Darby (BUY; TP: RM9.00) and CBIP (BUY; TP: RM2.41).

Source: Hong Leong Investment Bank Research - 11 Nov 2016