Regional Plantations - Maybank Kim Eng 2018-11-27: A Possible Game Changer

Regional Plantation Stocks - Maybank Kim Eng Research | FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z)

Regional Plantations - A Possible Game Changer

Indonesia’s upstream, Malaysia’s exports to benefit

  • While sketchy in details, Indonesia’s proposal to temporarily remove palm oil levy will benefit purer upstream planters there and Malaysia’s exports. Indonesia’s downstream players will be the biggest losers as they now have to compete on a level playing field with Malaysian players in the export market.
  • Pending details, we are generally positive on this change as it may help to reduce Malaysia’s high stockpile.
  • Maintain NEUTRAL on the sector with selected BUYs on First Resources, Bumitama Agri, Genting Plantations and Ta Ann.

Indonesia to temporarily remove palm oil levy

  • News media reported that the Government of Indonesia will temporarily remove a levy on palm oil after a sharp drop in CPO price which has hurt farmers.
  • Indonesia collects USD50/t levy on CPO export, USD20/t on RBD Palm Oil, and USD30/t for RBD Palm Olein exports to help finance the development of its palm-based biodiesel and replanting programme (of smallholders). The latest policy will take effect as soon as the Finance Ministry issues the regulation (said to be on 2 Dec).
  • We understand from another source that the CPO export levy will be USD25/t when CPO price goes up to between USD500-549/t and reinstated in full (ie USD50/t) when CPO price is above USD549/t (presently at ~USD420/t).
  • As for Indonesia’s B20 blend programme, it will proceed as usual in 2019 as we understand the Crop Estate Fund has collected sufficient funds for now.

Farmers are clear winner from this proposal

  • We believe the recent bumper harvest (Aug-Nov) and logistic constraints in Indonesia have caused tanks to overflow resulting in millers refusing to take in FFB from farmers (without a discount). We heard millers suffer from low oil quality as FFB harvested were not processed in time (ie not within 24 hours of harvest as tanks were full) which resulted in formation of high FFA (“Free Fatty Acid”, ie low oil quality). This has forced millers to buy FFB at cheaper prices as they too have to sell at a discount to refiners because of the low quality. Coupled with the USD50/t CPO levy, it is understandable that farmers suffered the most during this period.

Positive for Malaysian exports, and possibly prices

  • The temporary removal of this export levy will benefit pure Indonesian upstream players (like Genting Plantations (BUY), Bumitama Agri (BUY), IOI Corp (HOLD), TSH Resources (HOLD), IJMP MK (Not Rated), LSIP MK (Not Rated)) at the expense of pure downstream players (no specific names). Upstream planters will get extra USD50/t in CPO sales proceed (which flows directly to their bottom lines) when this rule comes into effect.
  • But it will have neutral impact on integrated players in Indonesia (like First Resources (BUY), KLK MK (HOLD), Sime Darby Plant (HOLD)).
  • As for Malaysia, this will create a more level playing field. Indonesian exporters are now able to sell CPO at ~MYR200-300/t cheaper than Malaysian exporters. A removal of the export levy can help restore Malaysia’ competitiveness in the export market and quickly bring down Malaysia’s stockpile.
  • Unfortunately, in the absence of reliable data in Indonesia, the market views Malaysia’s stockpile as a proxy to the region’s (ie Indonesia and Malaysia) stockpile for price discovery.

Risk statement

  • There are several risk factors which may affect our sector view, earnings estimates, price targets, and ratings of stocks under coverage. Key risks to the sector and companies are:
    1. weather anomalies resulting in poorer-than-expected output growth,
    2. lower-than-expected CPO price achieved,
    3. negative policies imposed by import countries,
    4. unfriendly government policies at producing countries,
    5. sharply lower crude oil prices which makes palm biodiesel demand not viable, and
    6. weaker competing oil prices (like soybean and rapeseed).

Ong Chee Ting CA Maybank Kim Eng Research | 2018-11-27
SGX Stock Analyst Report BUY MAINTAIN BUY 2.000 SAME 2.000