Highlights

• Stockpile remained on downtrend in Jan-17… Declining by 7.6% mom to 1.54m tonnes. The lower stockpile was pulled by a 13.4% mom decline in output amidst relatively stable exports (which increased by 1.2% mom to 1.28m tonnes). Against Bloomberg consensus, the stockpile came in higher than consensus median estimate of 1.49m tonnes.

• Output declined by 13.4% mom to 1.28m tonnes… The decline in output from Peninsular region (-18.2% mom) was more pronounced than East Malaysia (-13.4% mom). On yoy basis, we note that palm output increased for the second straight month (by 13% yoy), indicating that palm output has begun recovering from the severe El Nino episode.

• Exports increased for the first time since Aug-16 (albeit marginally)… by 1.2% mom to 1.28m tonnes, as lower exports to India (-15.4%), EU (-20.8%) and Pakistan (-52.4%) were more than mitigated by higher exports to other countries, including Bangladesh (+120%), Saudi Arabia (+104%), and South Korea (+109%).

• Moving into the following month (i.e. Feb-17)… Stockpile will likely remain on a downtrend, as seasonally lower exports to China will be offset by seasonally lower palm production. While exports to India has bottomed and showed signs of recovery, we believe the recovery will likely be gradual (and unlikely to go back to the previous level), as current high palm oil prices cap demand.

Catalysts

• Revisit of weather uncertainties, which would result in supply distortion, hence boosting prices of edible oil.

• Slower-than-expected recovery in palm production, resulting in palm prices sustaining at high level.

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 (↔)

• Maintain average CPO price assumption of RM2,500/tonne for 2017-2018. 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 (in the absence of significant demand growth catalyst).

Top picks

• For exposure, our top picks for the sector are Sime Darby (BUY; TP: RM10.06), Hap Seng Plantations (BUY; TP: RM2.83) and CBIP (BUY; TP: RM2.48) .

Source: Hong Leong Investment Bank Research - 13 Feb 2017