Highlights

• Stockpile recovered from a 6-year low… increasing by 6.5% mom to 1.55m tonnes in Mar-17, on higher output and imports, which more than offset improved exports. Against Bloomberg survey, the stockpile came in higher than consensus median estimate of 1.52m tonnes.

• Output recovered mom… by 16.3% mom to 1.46m tonnes in Mar-17, as output from most states (except for Johor and Terengganu states) recovered from a seasonally lower output month (due to shorter month). On yoy basis, output increased for the 4 th consecutive month since Dec-16.

• Exports recovered by 14.3% mom to 1.27m tonnes… boosted mainly by higher exports to India (28.4% mom), Pakistan (+11.3% mom) and USA (+19.3% mom). Cargo surveyor Intertek Testing Services indicated that palm oil shipments from Malaysia rose by 21% mom to 307k tonnes for the first 10 days of Apr-17.
   
• Moving into the following month (i.e. Apr-17)… We believe inventory level will remain low in Apr-17, as output recovery will be offset by stronger palm oil demand arising from: (1) Restocking activities in Muslim countries ahead of Ramadhan month (starting from end-May); and (2) Seasonally stronger demand from China (as palm oil demand from China tends to strengthen post winter season).

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 - 11 Apr 2017