Highlights

• 19-month high stockpile… Stockpile rose for the 3 rd consecutive month (by 4% mom) to 2.02m tonnes in Sep-17, mainly on the back of higher opening stock level. The reported stockpile came in slightly higher than consensus median estimate of 2m tonnes.
• Production declined by 1.7% mom to 1.78m tonnes…Dragged by a 2.5% mom decline in East Malaysia and 1% mom decline in Peninsular Malaysia, and this could be due to shorter working month in Sep-17 vis-à-vis Aug-17 (we believe). YTD, production increased by 12.2% to 14.4m tonnes.
• Exports increased for the 7 th consecutive month… By 1.8% mom to 1.52m tonnes in Sep-17, as higher exports to China and Pakistan (which increased by 41.6% and 87.7% respectively) more than offset lower exports to EU (-38.5%). According to cargo surveyor Intertek Testing Services, palm oil shipments increased by 18.1% mom to 448k tonnes for the first 10 days of Oct-17.
• Inventory to remain elevated in Oct-17… On the back of seasonally higher production in Oct-17, palm’s reduced price competitiveness against the soyoil (see Figure 4), and the absence of seasonal re-stocking activities. Beyond which, we expect stockpile to normalize as seasonally weaker production kicks in (from Nov-17 onwards).

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.

• Maintain Neutral stance on the sector, as we believe the 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 - 11 Oct 2017