Agribusiness - CGS-CIMB Research 2018-11-27: Potential Impact Of Revision To Export Levy


Agribusiness - Potential Impact Of Revision To Export Levy

  • Indonesia has agreed to adjust the levy on palm oil exports due to low prices.
  • This is likely to benefit upstream planters and disadvantage processors.
  • It could make Indonesia palm oil more cost competitive vs. Malaysia. Maintain NEUTRAL rating and key top picks.

Background on Indonesia export levy

CPO levy introduced to support biodiesel program in 2015

  • Indonesia passed several regulations in 2015 to establish the Indonesia Oil Palm Estate Crop Fund (BPDP-KS) and introduce a levy on palm oil exports. The government introduced the palm oil export levy on 16 Jul 2015, partly as a mechanism to support the consumption of domestic palm biodiesel.
  • The Indonesia Oil Palm Estate Fund was formed following the sharp drop in crude oil prices in 4Q14, which makes it uneconomical for palm oil to be converted to biodiesel and following an unsuccessful attempt by the industry to get higher biodiesel subsidies from the government.
  • The levy imposed is US$50 per tonne on crude palm oil and US$20-30 per tonne for processed palm oil. (Fig4 in the PDF report attached) Revenue collected from the levy is channeled to the Indonesia Palm Oil Estate Fund, which is in charge of managing the funds (Fig3 in the PDF report attached).

Collection from CPO export levy

  • The collection from export levies has been used primarily to subsidise biodiesel producers in support of the government’s biodiesel programme. Apart from this, the regulation dictates that the funds collected can also be used for human resource development, replanting, research and promotions for the palm oil industry.
  • According to the USDA Foreign Agricultural Service (FAS) report, BPDP-KS collected Rp32.9tr (US$2.3bn) from 2015-2017 and has disbursed biodiesel incentives of Rp24.17tr (US$1.7bn) from 2015 to Apr 2018.
  • It was also reported in the media that the fund collected Rp6.4tr (US$0.44bn) from palm oil export levy in 1H18, which is nearly 60% of this year’s Rp10.9tr (US$0.75bn) target. It disbursed Rp4.4tr (US$0.3bn) in 1H18 to subsidise biodiesel production, while the remainder was used for the development of the country’s palm oil industry.
  • In 2017, it was reported that BDPD-KS collected Rp14.2tr (US$0.98bn) in export levies from 37.4m tonnes of CPO and derivative products and used Rp10.3tr (US$0.71bn) of the proceeds for the distribution of 2.37m kls of biodiesel.
  • In 2016, it collected Rp10.69tr (US$0.74bn) proceeds in export levy and distributed 2.77m kls of biodiesel.

Changes to export levy rate when CPO prices below US$550

  • The news of the change in export levy for palm products does not come as a surprise to us, as Indonesia’s coordinating minister had earlier indicated that the government was looking into this as a possibility.
  • The revised export levy structure only benefits upstream planters when the CPO price falls below US$550 per tonne. When the CPO price rise above US$549 per tonne, the current export levy rate will remain status quo.

Positive for upstream Indonesian planters

  • This development is positive for Indonesian farmers/upstream producers at the current CPO price of US$410 per tonne in Indonesia as the CPO export tax will be reduced to US$0 per tonne from US$50 per tonne when the new levy structure comes into effect.
  • The revised lower levy when the CPO price falls below US$550 per tonne will reduce the export levy collection by the government, which is likely to be passed on to farmers through higher domestic selling prices for CPO, under current times. However, the savings from the levy could be split between farmers and consumers/importers over time depending on palm oil inventory levels.
  • For now, we expect most of the benefits to flow through to the farmers, via higher domestic CPO prices as we expect stocks to be pare down starting Nov- Dec. This will also narrow Indonesia’s CPO price discount against Malaysia which stood at around US$420 per tonne (based on the quarterly ASP for CPO achieved by Sime Darby Plantations).
  • Plantation companies under our coverage with exposure to estates in Indonesia are Golden Agri Resources, First Resources, Wilmar International, Genting Plantation, IOI Corp, KL Kepong and FGV. However, the revision will not have a significant impact on our FY19F/20F net profit forecasts for planters, which assumes a CPO price of RM2,400/RM2,500 per tonne (US$571/595 per tonne), which is the threshold where the export levy remains status quo.

Negative for downstream processors in Indonesia

  • This news is negative for downstream palm oil processors, when the CPO price drops below US$550 per tonne, as the cut in the levy rate erodes the processing margin currently enjoyed by palm oil processors. For e.g., when CPO prices are in the range of US$500 to US$549 per tonne, the export levy gap between processed palm products and CPO falls from US$20- 30 per tonne (previously) to US$15-20 per tonne. When the CPO price falls below US$500/tonne, the duty differential between processed and CPO falls to zero (see Fig 10).
  • As such, at the current price level, the revision will level the playing field between Indonesia palm oil processors and Malaysian palm oil processors. Malaysia currently has zero export tax on CPO and processed palm products.
  • Plantation companies with exposure to the downstream business in Indonesia are Wilmar International, Golden Agri Resources, First Resources, Sime Darby Plantations and KL Kepong. Malaysian plantation companies with downstream processing assets are FGV, Sime Darby Plantations, Genting Plantations, KLK and IOI Corp.

Maintain NEUTRAL rating on the sector

  • The 14% fall in CPO price over the past month to RM1,749 per tonne is due to strong CPO production which have led to a build-up of inventories at close to historic high levels. This has led to logistics issues (shortage of barges and storage facilities) in some of the key palm oil regions in Indonesia. This, coupled with weak demand due to cautious buying by key customers, has led to the sharp correction in palm oil prices.
  • We gathered that the high inventory situation in Indonesia has improved gradually and production in some palm oil regions may have peaked in Oct. This will lead to a slower m-o-m rise in supply and help to pare down palm oil stocks over time.
  • The response by the Malaysian and Indonesian governments to raise biodiesel mandates which will help lift the usage of CPO over the next few months should also help to reduce stockpiles and gradually raise CPO price.
  • We maintain our CPO price forecasts of RM2,260/RM2,400/RM2,500 per tonne for FY18/19/20F. Apart from low CPO prices, other challenges facing plantation companies going into 2019 are higher minimum wage and rising fertilizer prices.
  • Maintain a NEUTRAL rating on the sector with Wilmar International, First Resources and Genting Plantations remaining our key picks among the regional planters.

Highlighted Companies

First Resources Ltd

  • Rating: ADD, Target Price: S$2.08.
  • The attraction of First Resources lies in its strong output growth prospects due to its young estates and undemanding valuations of 13x P/E for FY18.

Genting Plantations

  • Rating: ADD, Target Price:RM10.60.
  • We like Genting Plantations for its rich land bank and young estates. The group has one of the youngest estates age profiles compared to its big cap peers in Malaysia.

Wilmar International

  • Rating: ADD, Target Price:S$4.10.
  • We like Wilmar due to its attractive valuations and plans to unlock value via the lis operations by 2H19.

Ivy NG Lee Fang CFA CGS-CIMB Research | 2018-11-27
SGX Stock Analyst Report ADD MAINTAIN ADD 4.100 SAME 4.100