Highlights

• 5 th consecutive month rise in stockpile… Although production has declined from its seasonal peak, stockpile rose for the 5 th consecutive month, by 16% mom to 2.56m tonnes in Nov-17, on the back of higher opening stock and lower exports. Against the consensus, the stockpile came slightly higher than expected (Bloomberg consensus estimate of 2.20m tonnes).

• Palm production has entered to low production cycle…Production declined by 3.3% mom to 1.94m tonnes in Nov-17 on seasonal factor (as palm production typically peaks in Oct). YTD, production rose by 14.1% to 18.10m tonnes.
• India, EU and Pakistan were the main culprits to exports decline… Exports declined by 11.9% mom to 1.35m tonnes, as higher exports to China (+4.8%) and USA (+28.5%) were more than offset lower exports to India (-39.8%, which was due to the absence of festive driven restocking activities and higher import duties on edible oils including palm oil), Pakistan (-25.2%) and EU (-22.7%).
• Moving to Dec-17… We believe the current high stockpile will likely ease from Dec, as seasonally low production cycle has started kicking in, and this would offset seasonally lower exports demand from China.

• Mixed 3Q17 results… 4 out of 9 plantation companies (which reported their quarterly results in Nov-17) came in within our expectations, 4 companies (namely CBIP, HSP, IJMP and TSH) missed our expectations, while FGV’s results beat our expectation (see page 3-4 for details).

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

• None.

Source: Hong Leong Investment Bank Research - 13 Dec 2017