Highlights

• Marginally higher stockpile… Stockpile increased by 3% mom to 1.6m tonnes, as a 5.8% mom increase in output was partly offset by a slight increase in exports. Against Bloomberg survey, the stockpile came in lower consensus median estimate of 1.63m tonnes (as consensus was expecting slightly higher output).

• Palm output rose for the 2 nd consecutive month… By 5.8% mom to 1.55m tonnes in Apr-17, driven mainly by strong output growth in Sabah, Pahang and Terengganu states. Overall FFB yield rose further to 1.17 tonnes/ha in Apr-17 (from 1.1 tonnes/ha in Mar-17). YTD, we note that output rose by 18.2% to 5.5m tonnes (on the back of 5 straight months of output increase since Dec-16).

• Exports grew 1.4% mom to 1.28m tonnes… As stronger demand from China and EU were partly offset by weaker demand from India. Both cargo surveyors (ITS and SGS) indicated that palm oil shipments from Malaysia rose double digit (by 13% and 15% mom) for the first 10 days of May-17.

• Moving into the following month (i.e. May-17)… We believe inventory level will remain low in May-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).

In

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 - 12 May 2017