Plantation - UOB Kay Hian 2015-11-05: Indonesia Biodiesel Train Is Moving At High Speed

Plantation - UOB Kay Hian 2015-11-05: Indonesia Biodiesel Train Is Moving At High Speed Plantation Sector WILMAR INTERNATIONAL LIMITED F34.SI  FIRST RESOURCES LIMITED EB5.SI  GOLDEN AGRI-RESOURCES LTD E5H.SI  BUMITAMA AGRI LTD P8Z.SI  INDOFOOD AGRI RESOURCES LTD 5JS.SI 

Plantation – Regional: Indonesia Biodiesel Train Is Moving At High Speed 

  • Indonesia expects to consume up to 1.85m kilolitres (1.61m tonnes) of biodiesel in Nov 15-Apr 16. 
  • This is equivalent to 268,074 tonnes/month, higher than the market’s expectation of 200,000 tonnes/month and translates to an annualised volume of 3.2m tonnes for blending under the PSO programme. 
  • This is positive for the sector as production is expected to be affected in 2016. 
  • Current spot prices do not reflect the tight situation due to excess supply. 
  • Maintain MARKET WEIGHT. 



WHAT’S NEW 


• 1.85m kilolitres of biodiesel to be produced in the next six months. 

  • The Ministry of Energy And Mineral Resources, Indonesia announced on 30 Oct 15 a total biodiesel procurement of 1.85m kilolitres from Nov 15 to Apr 16, to be produced by 11 biodiesel companies. Wilmar International (WIL SP/BUY/Target: S$3.60) and First Resources (FR SP/BUY/Target: S$2.40) both secured contracts to supply under this procurement programme.

 • Consumes 426,736 kilolitres of biodiesel as of Aug 15. 

  • According to Jakarta Post, Indonesia Oil Palm Estate Fund (BPDP) fund distribution director Dadan Kusdiana said the fund is subsidising biodiesel with prices averaging at Rp2,500 (US$0.18) per litre. The special agency, set up as a public service agency (BLU) under the Finance Ministry, has been collecting levies on exports of palm oil for the Indonesia’s CPO fund since Jul 16 to develop the palm-oil industry and fund biodiesel subsidies. 
  • As of today, the BPDP has collected around Rp4t from CPO exporters. Of this amount, BPDP has disbursed around Rp300b to fund subsidies for B15 biodiesel production. Of note, consumption of biodiesel has reached 426,736 kilolitres as of August. 

• Confidence boost – procurement volume is higher than expected. 

  • The continuous procurement of biodiesel in Indonesia has boosted sentiments in the palm oil market which has been suffering from a downtrend in CPO prices since 2012. The procured biodiesel volume of 268,074 tonnes per month exceeds the market’s expectation of 200,000 tonnes per month. This volume is solely meant for Public Sector Obligations (PSO) blending. 
  • The non-PSO segment is another important segment for the industry and industry players expect this segment to procure as much as 2.4m kilolitres (or 2.1m tonnes of CPO) in 2016. Thus, all in, the total volume in this segment could be as large as 5.3m tonnes vs the estimated 1.2m tonnes for 2015. 

 • Higher forward curve as there is ample supply currently. 

  • The price gap between the spot month and forward contract CPO prices have widened again to about RM156/tonne as of yesterday. Spot prices are capped by high inventories in both Malaysia and Indonesia, and thus there is no rush for buyers to pay higher prices now. However, the forward curve has been rising on higher biodiesel demand in Indonesia and over potentially tighter palm oil supply in 2016 and 1H17. 



ACTION 


• Maintain MARKET WEIGHT. 

  • We are expecting CPO prices to trade within the price range of RM2,200-2,500 by end-15 and trend higher in 1Q16. 
  • We are reviewing our sector weighting on the back of: 
    1. tighter palm oil supply, 
    2. recovery in global demand on the back of stronger demand arising from more Indonesian biodiesel blending, and 
    3. soybean supply growth which has been tapering off. 
  • Given the severely dry weather which is highly concentrated in select regions, we are very selective in our top picks as not all companies will benefit from the rising CPO prices. Key factors which we have assessed are: 
    1. location of estates – avoid badly affected areas such as Northern and Southern Sumatra, South Kalimantan and Sabah, 
    2. prefer companies with higher young prime areas (aged of 5-10 years), which can relatively withstand dry conditions better vs areas with young and older trees, and 
    3. companies with good management teams. 
  • Taking these criteria into consideration, our preferred stock picks are First Resources, Astra Agro Lestari and Bumitama Agri. 
  • Companies that will benefit from the higher biodiesel volume in Indonesia are Wilmar International (the world’s largest CPO-based biodiesel producer) and First Resources (biodiesel capacity of 200,000 mt p.a.). 



SECTOR CATALYSTS 


• Lower soybean supply. 

  • The USDA is revising down its estimate for US soybean harvesting volume and this should ease oversupply concerns. Planting in South America would be another phenomenon to watch out for. 

• Higher crude oil prices. 

  • If the recent crude oil recovery is sustainable and prices go above US$70/bbl, this should stimulate more demand for biodiesel. 



ASSUMPTION CHANGES 

  • Our assumptions are based on an average CPO price of RM2,200/tonne for 2015 and RM2,300/tonne for 2016. CPO prices could see upside if Indonesia’s biodiesel mandate is fully implemented. 


RISKS 

  • Backtracking of biodiesel mandates in Indonesia and Malaysia. 
  • Weakening crude oil prices.


PEER COMPARISON





Regional Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-05
UOB Kay Hian Analyst Report BUY Maintain BUY 3.60 Same 3.60
BUY Maintain BUY 2.40 Same 2.40
BUY Maintain BUY 0.48 Same 0.48
BUY Maintain BUY 1.10 Same 1.10
HOLD Maintain HOLD 0.80 Same 0.80


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