Highlights

• Stockpile rose for the 4 th consecutive month… By 8.4% mom to 2.19m tonnes in Oct-17, mainly on the back of a 12.9% rebound in production, which more than offset a mild increase in exports (by 2% mom). Against the consensus, the stockpile came in within expectations (Bloomberg consensus estimate of 2.2m tonnes).

• Production rebounded mom… By 12.9% mom to 2.01m tonnes (highest since Nov-15) on the back of seasonal factors (as palm production typically peaks in Oct while production in Sep was dragged by shorter working month). YTD, production rose 13.1% yoy to 16.1m tonnes.

• Exports increased marginally… By 2% mom to 1.55m tonnes, as higher exports to the EU region and Pakistan (which increased by 84.6% and 6.8%, respectively) were offset by lower exports to China and India (which declined by 27.4% and 8.7%, respectively, on the back of seasonal factors).

• Inventory to ease from Nov… as low production season kicks in. Improved price competitiveness (against competing soybean oil) will also likely boost demand for palm oil.

• Results preview… Except for Hap Seng Plantations and IJM Plantations, most upstream plantation players will likely report stronger results (both qoq and yoy), driven by stronger FFB production (details in Figure 5) amidst flattish CPO prices.

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 - 13 Nov 2017