Highlights

• While we believe current high CPO prices will sustain into 1Q17 (underpinned by carryover effect of previous El Nino episode and seasonally low production cycle), we see CPO prices trending lower for the remaining quarters of 2017.

• CPO output will likely improve from 2Q17, as the carryover effect of El Nino and seasonally low production cycle ends.

• Oil World projected world soybean output to increase by 7.3% to 334.3m tonnes in 2017, mainly on the back of higher output from the US, India and Brazil. Besides, USDA projects soybean plantings in US to reach a record in 2017- 18 (85.5m acres, 1.8m acres more than in 2016-17), at the expense of lower corn and wheat plantings, which in turn means even more soybean supply upon harvesting.

• Among the major palm oil consuming countries, both India and China will remain as Malaysia’s top export destinations in 2017. Palm oil demand for these two countries will unlikely increase significantly, as: (1) Continued structural adjustment in China will continue to moderate China’s economy growth, hence limiting palm oil consumption; (2) Current high palm oil prices typically cap demand (particularly from price-sensitive countries such as India); and (3) The recent demonetization of Indian rupee may continue to weigh on the India’s palm oil imports (at least in the near term).

• While we expect CPO price to trend lower post 1Q17, we expect palm oil price to remain relatively stable, supported by our expectation of a still-weak MYR (against the US$) and biodiesel mandates (particularly, in Indonesia).

• We maintain our average CPO price assumption of RM2,500/tonne for 2017 and 2018 respectively.

• We take this opportunity to roll forward our valuation base year from 2017 to 2018. Following the roll-forward of valuation base year, our TPs are changed marginally, but recommendations remain unchanged.

Risks

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO.

• India imposes higher import duty on CPO.

• Escalating production cost (particularly labour cost).

Rating

NEUTRAL (↔)

• We maintain our Neutral stance on the sector, as we believe our anticipation of palm oil production recovery will be offset by lower CPO prices (given the lack of demand growth catalyst).

Sector View

• We maintain Neutra l on the sector. For exposure, our top picks are Sime Darby (BUY; TP: RM9.06) , Hap Seng Plantations (BUY; TP: RM2.83) and CBIP (BUY; TP: RM2.48) .

Source: Hong Leong Investment Bank Research - 5 Jan 2017