Agribusiness - CGS-CIMB Research 2018-12-05: The Finer Details On Indonesia's Export Levy

FIRST RESOURCES LIMITED (SGX:EB5) WILMAR INTERNATIONAL LIMITED (SGX:F34)

Agribusiness - The Finer Details On Indonesia's Export Levy

Indonesia issues regulation on its revised export levy rates for palm products.
The key difference against earlier proposal is the decision to raise the price thresholds to be in line with the Trade Ministry’s reference price.
The move is likely to benefit upstream planters and disadvantage processors

Indonesia has revised the export levies on palm oil and its derivative products following a drop in prices, according to a Finance Ministry regulation on the government website.
Under the revised ruling, the government will not collect levies from palm exporters when prices are below a threshold of US$570 per tonne, but will charge US$10-25 a tonne once prices are in a range of US$570-619 per tonne. The levy will rise to US$20-50 when prices hit above US$619 per tonne.
Under the previous rules for levies, exporters paid US$20-50 per tonne regardless of palm price levels.

The details of the new regulation were different from those announced last week. Indonesia's Coordinating Minister for Economic Affairs Darmin Nasution had earlier said the zero levy would be implemented when prices go below US$500 per tonne (vs. US$570 per tonne in the final regulation) and the export levy will revert to US$20-50 per tonne when CPO prices rise above US$549 per tonne (vs. US$619 per tonne in the new regulation).
He explained that the difference in price thresholds was due to the adoption of the Trade Ministry's reference price for the regulation.

We are slightly surprised by Indonesia's decision to raise the price threshold by US$70 per tonne vs. previous proposal. This is because the government will use the Trade Ministry’s monthly reference price in deciding the monthly levy, according to the regulation. The monthly reference price is set based on palm prices in Indonesia, Malaysia and Rotterdam. We gather that the higher crude palm oil prices in Rotterdam (typically ranges from US$60-70 per tonne premium to spot prices in Malaysia) means the government has to increase the floor price for exports to be imposed with levies.

We maintain our view that the removal of export levy will raise the competitiveness of Indonesian palm oil product exporters as they would have saved between US$20-50 per tonne export tax when CPO price is below US$570 per tonne.
The bulk of the savings is likely to flow back to the Indonesian farmers via higher domestic CPO prices. However, should there be an acute excess supply of palm oil in the global market, the benefits may be accrued to importers via lower prices. This should help narrow the selling price gap between Indonesian and Malaysian CPO products, which have expanded to RM420 (US$100) per tonne in 3Q18, back to possibly around US$30-50 per tonne over time.

This news is positive for upstream planters with exposure to Indonesia as the revision in export levy rates could help support CPO prices at current levels. However, it will not have significant impact on our FY19F/20F net profit forecast for planters, which assumes CPO price of RM2,400/RM2,500 per tonne (US$641/US$665 per tonne) at the threshold where the export levy remains status quo.
This news is negative for Indonesian downstream processors as at lower CPO prices, the revised levy will erode the margin advantage of downstream players, which is currently the price diffe en CPO and processed palm products.
Maintain NEUTRAL rating on the sector.

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 valuation of 13x P/E for CY18F.

Rating: ADD, Target Price: RM10.50.
We like Genting Plantations for its rich land bank and young estates. The group has one of the youngest estates age profiles compared with its big cap peers in Malaysia.

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 | https://research.itradecimb.com/ 2018-12-05

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