Highlights

• Stockpile declined for the 2 nd straight month … By 2.8% mom to 2.48m tonnes in Feb-18, as lower exports (-13.3% mom) was more than offset by a 15.4% mom decline in output. Against the consensus, the stockpile came higher than Bloomberg consensus estimate of 2.39m tonnes.

• Production fell further… By 15.4% mom to 1.34m tonnes due to seasonal factor (historically, production was the weakest in the month of Feb). We note that the mom fall in production was more pronounced in East Malaysia (-16.9%), while Peninsular Malaysia registered a 14% decline in production.

• Exports resumed on downtrend… Declining by 13.3% mom to 1.31m tonnes as higher exports to India (+55.7%) and EU region (+31.3%) was more than offset by lower exports to China (-33.1%), Pakistan (-33.2%) and USA (-15.6%).

• Near-term stockpile will likely remain high… We believe current high stockpile will likely persist in the near term, on the back of : (1) Seasonal production recovery from Apr-18; (2) Suspension of CPO export taxes in Malaysia will likely lapse by early-Apr; (3) Indian government’s recent move to raise import duties on palm oil further; and (4) Narrow price spread between CPO and soybean oil.

• On a separate note, cargo surveyor ITS estimated that Malaysia’s palm oil exports fell 12.1% mom for the first 10 days of Mar-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 - 13 Mar 2018