Plantation – Regional - UOB Kay Hian 2017-03-15: Biodiesel Demand From Indonesia To Support CPO Prices

Plantation – Regional - UOB Kay Hian 2017-03-15: Biodiesel Demand From Indonesia To Support CPO Prices Plantation Sector FIRST RESOURCES LIMITED EB5.SI BUMITAMA AGRI LTD. P8Z.SI GOLDEN AGRI-RESOURCES LTD E5H.SI WILMAR INTERNATIONAL LIMITED F34.SI INDOFOOD AGRI RESOURCES LTD. 5JS.SI

Plantation – Regional - Biodiesel Demand From Indonesia To Support CPO Prices

  • In view of the potential downside pressure on CPO prices in 2H17 on stronger CPO production, BPDP is proposing to adjust the biodiesel pricing and to extend the subsidy to non-PSO segment. 
  • These changes are to increase domestic consumption by an additional 1-2m tonnes from the biodiesel segment, and will provide support to CPO prices in 2H17. 
  • Maintain OVERWEIGHT.



WHAT’S NEW


Indonesia’s third biodiesel procurement for PSO segment is progressing well. 

  • Total volume for Indonesia’s third procurement is set at 1.53m kl (or 1.33m mt), similar to the volume procured for May-Oct 16. We understand that the delivered volume for the third procurement is on track. We reckon that Pertamina is likely to announce the fourth biodiesel procurement for the Public Service Obligation (PSO) segment for May-Oct 17 in mid- or end-Apr 17.

Expect PSO demand to remain flat or increase marginally. 

  • According to the Indonesia Estate Crop Fund (BPDP), export levy collected is sufficient to support the biodiesel programme (PSO segment) and it expects the procurement volume for 2017 will match or be marginally higher than 2016’s. We are expecting biodiesel demand from the PSO segment is likely to be 2.5m-2.8m kl in 2017 (vs 2.6m kl in 2016).

Potential changes to biodiesel pricing and allocation of CPO fund. 

  • Indonesia’s CPO fund has successfully served PSO in 2016 and we understand that the Indonesian government plans to spur demand from non-PSO segment. However, the targeted CPO funds to be collected in 2017 is at about Rp10t-12t (2016: About Rp9.5t) which is insufficient to support the PSO segment’s biodiesel price based on the pricing mechanism of CPO base price+US$125/tonne and the proposed subsidy for the non-PSO segment of up to Rp2,000/litre. 
  • Thus, we understand that the BPDP may reduce biodiesel pricing with a formula of CPO base price+US$100/tonne from CPO base price+US$125/tonne currently for the PSO segment, while allocating part of the CPO fund to facilitate subsidies of up to Rp2,000/litre for the non-PSO segment. If these changes materialise, total biodiesel uptake could reach 6m kl in 2017 (vs about 3.3m in 2016).


ACTION 


Maintain OVERWEIGHT. 

  • We expect CPO prices to stay firm in 1H17 and to weaken in 2H17 when production recovers and inventory starts to pile up. 
  • We forecast CPO prices would average RM2,600/tonne for 2017 (2016: RM2,653) and RM2,500/tonne for 2018.

Top picks. 

  • Singapore-listed plantation companies are still our preferred picks. 
  • We like Bumitama (BAL/Target: S$1.25) for its young tree age profile, which spells strong production, and because it consistently delivers a high OER. BAL’s share price lags behind peers, providing for the greatest upside vs peers. 
  • We also like First Resources (FR/Target: S$2.15) for its efficiency in keeping costs low and strong FFB production growth, as well as Kim Loong (KIML/Target: RM4.20), Astra Agro (AALI/Target: Rp19,045) and Sampoerna Agri (SGRO/Target: Rp2,190).


ESSENTIALS 

  • Lower subsidy for PSO segment will affect margins. We understand that the new pricing mechanism (CPO+US$100/tonne) may squeeze companies such as Wilmar International’s (WIL), BAL’s, FR’s and Golden Agri’s (GGR) downstream operating margins but we still expect them to be profitable.


ASSUMPTION CHANGES 

  • No changes.


SECTOR CATALYSTS 

  • Weather disruption. Agricultural production is usually impacted by extreme weather. Any negative impact from the weather would be positive to prices.
  • Demand from key importing countries picking up significantly.


RISKS 

  • Backtracking of biodiesel mandates in Indonesia and Malaysia after the recent fall in crude oil prices.







Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-15
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.150 Same 2.150
BUY Maintain BUY 1.250 Same 1.250
HOLD Maintain HOLD 0.450 Same 0.450
SELL Maintain SELL 3.500 Same 3.500
NOT RATED Maintain NOT RATED 99998.000 Same 99998.000



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