Highlights

• The 3 leading palm oil price experts (namely Thomas Mielke, Dr. James Fry, and Dorab Mistry) projected CPO price to weaken in 2H17, on the back of output recovery.

• Mr Mielke expects CPO price to recover in the next 3-6 weeks (arising from insufficient supplies amidst strong world import demand), before it sees renewed price weakness from May-17 onwards. Given his anticipation of a slow CPO production recovery in 1H17, Mr Mielke projects average palm olein price of US$690/tonne in 2017 (higher than average price of US$674/tonne in 2016). For 2018, he projects average palm olein price to trade lower at US$630/tonne as CPO production recovers in full swing.

• Dr. Fry projects a significant recovery in CPO output to result in CPO stock level in Malaysia rising above 2m tonnes by Jul-17 and above 2.5m tonnes in 4Q17, and such production recovery will result in CPO price averaging at RM2,500/tonne during 3Q17 and easing to RM2,250/tonne in 4Q17. Nevertheless, Dr. Fry expects Indonesia’s biodiesel policy to act as a price stabiliser, which will set a floor to CPO price.

• Mr Mistry projects CPO price to hold at RM3,000/tonne until Sep-17, underpinned mainly by: (1) weather uncertainties, which may result in lower vegetable oil supply; (2) tight inventory level; and (3) potential delay in palm production recovery. He believes CPO price see an upward correction from current level to RM3,000/tonne until Sep-17. Thereafter, he expects a downward correction for a few months before it takes off again.

• We note that our in-house average CPO price projection of RM2,500/tonne for 2017 falls under the lower end of the experts’ views.

• We maintain our average CPO price assumption of RM2,500/tonne for 2017 (lower than average CPO price of RM2,640/mt in 2016), on the back of the anticipated recovery in CPO output, ample supplies of soybeans globally and the absence of strong demand catalyst.

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 Neutral on the sector. For exposure, our top picks are Sime Darby (BUY; TP: RM10.06) , Hap Seng Plantations (BUY; TP: RM2.89) and CBIP (BUY; TP: RM2.48)

Source: Hong Leong Investment Bank Research - 9 Mar 2017