Regional Plantations - Maybank Kim Eng 2019-01-02: A Positive Start To 2019

FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z)

Regional Plantations - A Positive Start To 2019

As India, the world's largest importer of palm oil, cuts import duties on palm oil by 4-9-ppts effective 1 Jan 2019, the industry is set to regain some market share that it has lost last year. Malaysian-based refiners/ exporters are set to benefit comparatively more, mostly at the expense of Indonesia. This will help to increase exports, lower stockpile, and lift CPO price.
Maintain NEUTRAL on the sector. Our current BUYs in the region are FIRST RESOURCES LIMITED (SGX:EB5), BUMITAMA AGRI LTD. (SGX:P8Z), and Ta Ann Holdings.

One of the key positive lookouts which we highlighted in our 2019 plantation sector outlook report entitled “2019, a year of price recovery” materialised. According to media reports, the government of India has cut the import duties on
1. crude palm oil to 40% (from 44%) from Malaysia and ASEAN origins, and
2. refined palm oil to 45% (from 54%) only from Malaysia origin, while having a smaller reduction to 50% (from 54%) from the rest of ASEAN countries – see Fig2 in the PDF report attached.
The cut in import duties is a fulfillment of a commitment made in a comprehensive economic cooperation agreement signed between Malaysia and India years ago. The revision is effective 1 Jan 2019 and Malaysian refiners are expected to benefit the most from this import duty revision.

As Indian consumers are price sensitive, we believe there is a good chance that palm oil will regain some market share it lost in Nov/Oct 2017/18 as long as the Indian government keeps the import duties of other vegetable oils unchanged.
According to The Solvent Extractors’ Association of India, palm oil lost some 2-ppts to 60% in market share in India’s total vegetable oils imports in Nov/Oct 2017/18 marketing year. India’s palm oil demand fell 6.4% last year to 8.7m MT – see Fig3 in the PDF report attached. Palm oil lost market share to sunflower oil last year due to a more punitive import duty hike on palm oil in Nov 2017 (+15-ppts) and again in Mar 2018 (+14-ppts) – see Fig 2.

CPO spot price has recently rebounded from its low of MYR1,717/t (21 Nov 2018) to MYR1,953/t (28 Dec 2018), a sign that the worst is over.
In addition to Indonesia’s recent decree (effective 4 Dec 2018) to amend its palm oil export levy whereby there will be zero export levy if CPO price is < USD570/t which has created a more level playing field for Malaysian refiners/exporters, India’s comparatively higher import duty cut (effective 1 Jan 2019) for Malaysia’s refined palm oil (vis-à-vis Indonesian refiners) will also provide further boost to Malaysia’s palm oil export competitiveness. This should result in higher exports volume from Malaysia, which in turn will help reduce the present high stockpile faster and lift overall CPO price higher.
Key risks to our CPO price view are government policy changes, demand, direction of diesel price, and weather anomalies.

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-01-02

SGX Stock Analyst Report BUY MAINTAIN BUY 2.100 SAME 2.100

BUY MAINTAIN BUY 0.960 SAME 0.960