Highlights

• Marginally lower stockpile on seasonal surge in exports.Stockpile fell marginally (by -2.6% mom) to 1.58m tonnes in May-17 as higher output was more than offset by a 17.3% mom surge in exports (which was in turn due to restocking activities ahead of Ramadhan month). The reported stockpile came in lower than consensus median estimate of 1.61m tonnes due to stronger-than-expected exports (1.51m tonnes vs. 1.45m tonnes projected by consensus median estimate).
   
• Output rose for the 3 rd consecutive month… By 6.8% mom to 1.65m tonnes as most states (with the exception of Negeri Sembilan) posted higher output, with overall FFB yield rising further to 1.27 tonnes/ha in May-17 (from 1.17 tonnes/ha in Apr-17).
   
• Exports surged by 17.3% mom to 1.51m tonnes… Weaker exports to China (-17.6%) was more than mitigated by seasonally stronger exports to India (+70.1%) and Pakistan (+97.5%). Cargo surveyor Intertek indicated that exports rose 5.8% mom to 367k tonnes for the first 10 days of Jun-17.

• Stockpile will only rise after Ramadhan… We believe inventory level will remain low in Jun-17 as the absence of seasonal demand boost will be offset by seasonally lower production (as palm production tends to slow during fasting month). We expect stockpile to start rising after Jun-17, on the back of seasonally stronger production and the absence of festive 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

• We maintain Neutra l on the sector. For exposure, our top picks are Sime Darby (BUY; TP: RM10.06) , United Malacca (BUY; TP: RM7.11) , and CBIP (BUY; TP: RM2.48) .

Source: Hong Leong Investment Bank Research - 14 Jun 2017