Highlights

• Stockpile remained on a downtrend for the 2nd consecutive month… Declining by 1.9% mom to 1.53m tonnes in Jun-17, as seasonally weaker production was outweighed by lower exports and domestic consumption. The reported stockpile came in lower than consensus median estimate of 1.59m tonnes, mainly on the back of lower-than expected production.
• Output declined for the first time since Feb-17… By 8.5% mom to 1.51m tonnes, with FFB yield declining to 1.39 tonnes/ha (from 1.45 tonnes/ha in May-17), due to seasonality (as palm production tends to slow during fasting month). On a yoy basis, we note that output declined for the first time after registering 6 consecutive months of output increase (since Dec-16).
• Exports declined by 8.4% mom to 1.38m tonnes… Mainly due to lower exports to China (-39.4%), India (-13%) and EU (-0.4%). We note that exports to China were at its lowest in Jun-17 since Feb-16, and we believe this was partly due to Malaysian palm’s weaker price competitiveness vs. Indonesia.

• Inventory level to increase from Jul-17… On the back of seasonally stronger production and the absence of festive demand. Cargo surveyor Intertek pointed that exports fell 1.9% to 367k tonnes for the first 10 days of Jul-17.

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 Neutral 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 - 11 Jul 2017