Palm oil inventory declined for the 5th consecutive month, by 0.5% MoM to 2.17m tonnes, as exports and domestic consumption outpaced production. Exports declined by 15.7% MoM to 1.29m tonnes, mainly on lower exports to India (arising from lagged impact of higher import duties on palm oil products) and EU region. Maintain 2018-2019 average CPO price assumption of RM2,500/tonne and NEUTRAL stance on the sector.

DATA HIGHLIGHTS

Palm oil inventory declined for the 5th consecutive month, by 0.5% MoM to 2.17m tonnes in May-18 (lowest since Sep-17), as exports and domestic consumption outpaced production.

Against the consensus… The stockpile came in higher than Bloomberg consensus estimate of 2.13m tonnes, mainly on the back of higher-than-expected production (1.53m tonnes vs. 1.5m tonnes estimated) and lower-than-expected exports (1.29m tonnes vs. 1.35m tonnes estimated).

Production declined for the 2nd consecutive month… By 2.1% MoM to 1.53m tonnes in May-18, dragged mainly by lower supplies from Sabah (-6.6%), Terengganu (-9.7%) and Pahang (-10.9%). YoY, production declined for the 1st time since Jun-17 (by 7.8%) due mainly to the lagged impact of El Nino in end-15, which has resulted a shift in cropping pattern last year.

India and EU dragged exports lower… Exports declined by 15.7% MoM to 1.29m tonnes, as higher exports to China (+42.2%) was more than negated by lower exports to India (-74.6%, possibly arising from lagged impact of higher import duties imposed on palm oil products) and EU region (-33.7%).

HLIB’s VIEW

Inventory to resume on uptrend in Jun-18. After 5 consecutive months of decline, we believe palm oil inventory will resume on uptrend in Jun-18, on the back of a seasonal uptrend in palm production and seasonally lower restocking activities (post Ramadhan month).

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

Maintain NEUTRAL. Maintain Neutral stance on the sector. We remain less sanguine on the sector’s near term earnings growth prospects, mainly on current weak CPO price environment (in particularly, the pure upstream players).

Source: Hong Leong Investment Bank Research - 12 Jun 2018