Highlights

• Stockpile declined for the first time since in 7 months…By 6.7% mom to 2.55m tonnes in Jan-18, mainly on the back of lower production and higher exports. Against the consensus, the stockpile came lower than Bloomberg consensus estimate of 2.73m tonnes.
• Production fell for the 3 rd consecutive month… By 13.5% mom to 1.59m tonnes in Jan-18, due to seasonal factor (as palm production usually starts on a declining trend in Nov and recovers only by Mar). We note that the mom fall in production was more pronounced in Peninsular Malaysia (- 17.1%), while production in East Malaysia fell by only 9.2%.
• Exports rose for the 2 nd month… By 6% mom to 1.51m tonnes in Jan-18, boosted by higher exports to India (+82.3%) and Pakistan (+19.9%), which more than mitigated lower exports to China (-10.6%), EU region (-10.3%) and USA (- 26.6%).

• Moving to Feb-18… Despite Malaysian government’s recent move to suspend CPO export taxes for 3 months (from 8 Jan 2018 to 7 Apr 2018) and low production cycle, we believe it is unlikely for stockpile to fall much lower from current level given the narrow price spread between CPO and soybean oil, and potentially weaker demand from China (due to restocking activities in previous months ahead of Chinese New Year). On a separate note, Cargo surveyor ITS estimated that Malaysia’s palm oil exports rose 14.7% mom for the first 10 days of Feb-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.

In

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 shortterm catalysts.

Top Picks

• CBIP (BUY; TP: RM2.13) .

Source: Hong Leong Investment Bank Research - 13 Feb 2018