KEY HIGHLIGHTS

• October inventory came in below consensus estimate

• Slight slowdown in demand from India and China

• Production unexpectedly decline mom and may have peaked in September

• Expect Nov-2016 inventory to increase by only 3% to 1.63m MT.

• Maintain POSITIVE view on. BUY KLK (TP: RM27.38) and IOICORP (TP: RM5.05)

October inventory came in below consensus estimate. Malaysia palm oil inventory level of 1.57m MT as of end-October 2016 is spot on as per our estimate but came in below consensus estimate of 1.67m-1.68m MT. We believe that consensus have underestimated the impact of lagged El Nino impact which has caused October production to decline 2%mom (against historical pattern of increasing). Against last month, inventory level has inched up by only 2%mom as production remains very limited. Against same period last year, inventory remains significantly lower yoy as it has tumbled 44%yoy.

Slight slowdown in demand from India and China. Export to India dropped 22% mom to 203,898 MT while export to China slipped 5% mom to 187,204 MT. Usage of palm oil may have temporary declined in China in the absence of stocking activity ahead of major festival. As for India, the end of stocking activity for Deepavali festival have caused lower demand for palm oil.

Production unexpectedly decline mom and may have peaked in September. Sarawak production declined the most by 4% mom to 350,773 MT. This is followed by Peninsular Malaysia in which production slipped 2% mom to 855,692 MT. Lastly, Sabah production fell 1% mom to 471,408 MT. On a yearly basis, production tumbled 18% and this suggests that the impact of El Nino is still there.

Expect Nov-2016 inventory to increase by only 3% to 1.63m MT. Key assumptions are: i) export decline of 6%mom and ii) production decline of 2%. We are expecting export decline as colder temperature in Northern Hemisphere should lead to lower usage of palm oil in China and European Union. However, the inventory is expected to remain tight as it is only expected to increase by 3% mom as production is also expected to decline 2% mom. Cargo surveyors’ data shows export decline of 16%mom in the first ten days of November. For production growth we are using seasonal factor to estimate the 2% decline.

Maintain POSITIVE view on the sector. BUY KLK (TP: RM27.38) and IOICORP (TP: RM5.05). We expect CPO price to remain high at the range of RM2500 to RM3000 per MT in the next three months. We like KLK (BUY; TP RM27.38) due to its high exposure to palm oil business and good earnings growth of +18%yoy to RM747m in 9MFY16. We also like IOICORP (BUY; TP RM5.05) due to its pure exposure to palm oil business both in the upstream and downstream divisions. The Company’s profit is also expected to recover in FY17 after the uplift of RSPO suspension.

Source: MIDF Research - 11 Nov 2016