Highlights

• We expect CPO price to be well supported at current level and maintain our average CPO price of RM2,500/tonne for 2018 (and range bound around RM2,400-2,600/tonne).

• The La Nina episode (which was recently made official), will likely lend support to near term CPO prices (particularly, in 1Q 2018).

• Impact from the recent import tax hike in India will likely be short-lived and India’s demand for palm oil will normalise, as India (the world’s largest importer of edible oils) imports nearly 80% of its edible oil requirement.

• However, we do not expect CPO price to trade up significantly either.

• A strong MYR (against the US$) does not bode well for CPO price, as it weakens the price competitiveness of palm oil against other competing oils (in particularly, soybean oil, the major competing oil to palm oil, which are denominated in US$).

• Despite the recent supply setback in Southern America region (arising from the unfavourable weather condition), Oil World projects soybean supply to increase by 3.8% to 442.8m tonnes (see Figure 9), on the back of higher output from the USA and China.

• We maintain our average CPO price assumption of RM2,500/tonne for 2018 and 2019 respectively.

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).

Rating

NEUTRAL (↔)

• We maintain our Neutral stance on the sector, as we believe our anticipation of palm oil production recovery will be offset by lower CPO prices (given the lack of demand growth catalyst).

Sector View

• We maintain Neutral on the sector.

• Top pick - CBIP (BUY; TP: RM2.13)

Source: Hong Leong Investment Bank Research - 9 Jan 2018