Highlights

• Stockpile rose further (by 8.8% mom) to 1.94m tonnes… As higher opening stock more than offset a 0.9% mom decline in production and a 6.4% increase in exports. The reported stockpile came in lower than consensus median estimate of 2m tonnes.
• Production declined by 0.9% mom to 1.81m tonnes… Due to seasonal effect (as the sharp increase in Jul-17 production was distorted by Ramadhan season in Jun-17). YTD, production increased by 13.6% to 12.4m tonnes.
• Exports increased for the 6 th consecutive month… By 6.4% mom to 1.49m tonnes, driven mainly by higher exports to China (+2.9%) and India (+13.5%, driven by restocking activities ahead of Diwali in Oct-17, we believe). According to cargo surveyor Intertek Testing Services, palm oil shipments increased by 6.9% mom to 380k tonnes for the first 10 days of Sep-17.

• Inventory to remain high in Sep-17… While palm’s improved price competitiveness against the soyoil (see Figure 4) and increased re-stocking activities from India (ahead of Diwali in Oct-17) may boost export demand, we believe inventory level may stay elevated in Sep-17, on the back of seasonally strong output.

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 (↔)

• We maintain our average CPO price assumptions of RM2,700/tonne for 2017 and RM2,500/tonne for 2018.

• 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.

Top Picks

• For sector exposure, our top picks are Sime Darby (BUY; TP: RM9.96) and United Malacca (BUY; RM7.11) .

Source: Hong Leong Investment Bank Research - 12 Sept 2017