Highlights

• Stockpile declined for the 2 nd consecutive month… by 5.3% mom to 1.46m tonnes in Feb-17 (the lowest level in 6 years), on the back of lower opening stock level and a 1.4% decline in output, which more than offset lower exports. Against Bloomberg survey, the stockpile came in slightly lower than consensus median estimate of 1.48m tonnes.

• Output declined by 1.4% mom to 1.26m tonnes… as the 4.2% mom increase in output from peninsular region was more than offset by a 7% mom decline in output from East Malaysia. On yoy basis, CPO output increased for the 3rd straight month, by 27.6%.
• Exports declined by 14% to 1.11m tonnes (the lowest since Feb-16)… dragged mainly by a lower exports to China (-38.4% mom, which was due to seasonal factors, we believe) and India (-4.3% mom, due to good domestic oilseeds production and better availability of edible oils). Cargo surveyor data indicated that palm oil shipments from Malaysia fell 25% for the first 10 days of Mar-17 from previous month.
• Moving into the following month (i.e. Mar-17)… We believe inventory level will remain low in Mar-17, as our anticipation of a seasonal recovery in CPO output in Mar-17 will likely be offset by stronger demand from China.

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

• We maintain Neutra l 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 - 13 Mar 2017