• Malaysia’s  Dec  2014  stockpile  at  2.01m  MT  (-12%  MoM,  +1% YoY) sets a positive tone for near term CPO price uptrend.
• We  maintain  our  view  that  1Q15  is  a  good  opportunity  for  a trade as CPO price makes a seasonal recovery.
• Top  BUYs  in  the  region:  BAL,  FR,  GENP,  SOP,  and  SIME.  SELL IOI Corp for its steep valuation.

What’s New

The  Malaysian  Palm  Oil  Board’s  (MPOB)  Dec  2014  inventory  dipped 12% MoM to 2.01m MT (+1% YoY), below market  estimates of 2.05m MT.  The  lower  MoM  stockpile  was  due  to  (i)  a  seasonal  decline  in production  (1.36m  MT;  -22%  MoM,  -18%  YoY),  exacerbated  by  the flood  which  hit  parts  of  Peninsular  Malaysia;  (ii)  flattish  exports (1.52m  MT);  and  (iii)  lower  imports  (0.09m  MT;  -9%  MoM,  +268% YoY)  which  more  than  offset  a  decline  in  domestic  consumption (0.198m MT; -12% MoM, +20% YoY).

CPO and crude oil (Brent) prices have decoupled of late due  to the recent flood in Peninsular Malaysia, and not so favourable weather in  parts  of  South  America  over  the  past  month   which  may  affect soybean development there. It is also important to note that global vegetable  oil  prices  have  traditionally  traded  at  a  premium  to crude oil prices.  

What’s Our View

Coupled  with  tight  palm  oil  supply  expectation  in  1H15  after  a relatively  good  harvest  in  2Q-3Q14  (and  potentially  aggravated  by two  distinct  periods  of  dryness  in  2014  which  affected  Sumatra, Peninsular  Malaysia  and  Central  Kalimantan  with  a  lagged  impact on  production),  we  expect  CPO  price  to  make  its  seasonally recovery  in  1Q15.  While  the  sector  call  remains  Neutral,  we maintain  our  view  that  there  is  still  a  short  term  trading opportunity in 1Q15. This, however, assumes that crude oil  (Brent) price bottoms out at ~USD55/bbl.

Our  top  BUYs  in  the  region  are  Bumitama  Agri,  First  Resources, Genting  Plantations,  Sarawak  Oil  Palms  and  Sime  Darby.  We advocate SELL on IOI Corporation for its steep valuation.

Key  swing  factors  in  2015  are  weather  (like  a  return  of  El  Nino), crude  oil  price,  further  Ringgit  and  Rupiah  weakness,  changes  in government  policies,  and  lackluster  enforcement  of  biodiesel mandates in Indonesia and Malaysia.

Source: Maybank Research - 13 Jan 2015