Highlights

• 6 th consecutive month rise in stockpile… Stockpile rose for the 6 th consecutive month, by 7% mom to 2.73m tonnes in Dec-17, mainly on the back of higher opening stock. Against the consensus, the stockpile came higher than Bloomberg consensus estimate of 2.69m tonnes.

• Production declined for the 2 nd consecutive month… By 5.6% mom to 1.83m tonnes, on seasonal factor (as palm production normally peaks during Sept/Oct). For the full year, CPO production rose 15% to 19.9m tonnes (from 17.3m tonnes in 2016), in the absence of El Nino.

• Exports rose by 4.9% to 1.42m tonnes in Dec-17… Mainly on the back of higher exports to India (+6.9%), EU (+34.6%) and US (+25%). Exports to China, on the other hand, declined by 13.9% to 175.4k tonnes, due to seasonal effect (as demand for palm oil tends to weaken during winter season).

• Moving to Jan-18… We believe the current high stockpile will likely ease from Jan-18, on the back of low production cycle and Malaysian government’s recent move to suspend CPO export taxes for 3 months (from 8 Jan 2018 to 7 Apr 2018), which will encourage CPO exports from Malaysia to price sensitive CPO consuming countries (such as China and India, which collectively accounted for 23.8% of Malaysia’s CPO exports in 2017). On a separate note, Cargo surveyor ITS estimated that Malaysia’s palm oil exports fell 1.35% mom to 359k tonnes for the first 10 days of Jan-18.

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 assumption of RM2,500/tonne for 2018-2019.

• Maintain Neutral stance on the sector, due to the lack of strong demand catalyst for palm oil. While La Nina and the Government’s recent move to suspend CPO export taxes will lend support to near-term CPO prices, these are just short term catalysts.

Top Picks

• CBIP (BUY; TP: RM2.13) .

Source: Hong Leong Investment Bank Research - 11 Jan 2018