Malaysia’s stockpile surged to a record high of 2.834m tonnes on production rebound and flattish export. While a kneejerk reaction is likely, we believe any weakness is a buying opportunity given that Malaysia’s numbers are becoming increasingly unreflective of the industry. We expect the current El Nino’s impact on global edible oil supply to be unprecedented come 2016. Maintain Overweight.

Production rebound. Malaysia’s production rose by 4.0% MoM, led by Sabah while West Malaysia’s production was flat. This was surprising as production tends to decline at this time of the year. We nevertheless believe the rise is unsustainable and output will continue with its seasonal decline this month. On a YTD basis, production was up by 2.1% at 16.908m tonnes.

Shipment number. Malaysia’s palm oil export rose just 1.9% MoM to 1.712m tonnes, bringing YTD number to 14.435m (+1.4% YoY). Indonesia on the other hand recorded a robust 9.4% MoM export growth and a very strong 22.0% YTD growth. Hence, Malaysia’s unexciting export numbers really are not indicative of flattish demand.

Inventory at record high. The 4.0% increase in production number without a corresponding increase in shipment resulted in a record high stockpile of 2.834m tonnes. Nevertheless, we suspect that the number isn’t reflective of the industry given that Indonesia’s shipment was strong and should have resulted in a low inventory number. USDA peg Indonesia’s inventory number at just 2.326m tonnes. On top of that, Indonesia’s biodiesel program, which has just been restarted, will soak up about 1.6m tonnes of palm from now to April 2016 and will remove excess inventory, if any at all.

Maintain Overweight. We maintain our Overweight call on the sector, expecting the current drought impact to result in very strong palm oil price next year. We expect equity prices to remain resilient as the market prices in this scenario for 2016. The recently announced privatization of Kulim (BUY, TP MYR4.10) will likely result in some MYR800m of institutional funds flowing into other Malaysian plantation stocks.

Source: RHB Research - 12 Nov 2015