Highlights

• We believe 2017 CPO price will average higher than RM2,500/tonne we projected earlier, given the strength of CPO price YTD (averaged at RM2,890/tonne) and dry weather concerns in the US (which will have a lingering effect on soybean prices between now and the harvesting season in in Oct-17).

• Beyond 2017, we maintain our view that current high prices will unlikely sustain, and we are keeping our projected average CPO price at RM2,500/tonne.

• Reduced concerns on El Nino, which in turn indicates palm production will likely remain stable. Weather forecasters recently indicated that El Nino-Southern Oscillation (ENSO) will likely remain neutral for the rest of 2017, putting the possibility of El Nino recurring to rest.

• World soybean inventory remains ample despite concerns on US soybean crop conditions. While the deteriorated soybean crop conditions in the US may result in lower soybean world production (US accounts for ~1/3 of world’s soybean output), Oil World predicts that the prospective decline in world production will be more than offset by higher opening stocks.

• The European Parliament recently urge the European Commission to phase out the use for vegetable oils for biofuels by 2020 . If this materialises, it will likely have a negative impact on both consumption and prices of palm oil over the longer term, as EU is the 2 nd largest importer of Malaysian palm oil after India (accounted for 11.8% of Malaysia’s palm oil exports in 1H17).

• We raise our FY17-18 earnings forecasts for plantation companies under HLIB’s coverage (by 1-75%), mainly to reflect the upward revision in our 2017 projected average CPO price by RM200/tonne to RM2,700/tonne.

• However, we maintain our target prices, as we have already rolled forward our valuation base year to 2018 back in Jan-17.

Risks

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO.

• India imposes higher import duty on CPO.

• Escalating production cost (particularly labour cost).

Sector View

NEUTRAL (↔)

• In this report, we raise our average projected CPO price for 2017 by RM200/tonne (or 8%) to RM2,700, but maintain our 2018 average projected CPO price at RM2,500/tonne.

• Despite the recent recovery in palm oil prices, we maintain our Neutral stance on the sector, as we believe recent strength in CPO prices will unlikely sustain into 2018, due to the absence of apparent demand growth catalyst and supply concerns.

Sector View

• For exposure, our top picks are Sime Darby (BUY; TP: RM10.06) and United Malacca (BUY; RM7.11).

Source: Hong Leong Investment Bank Research - 7 Aug 2017