Plantation – Singapore - UOB Kay Hian 2019-06-27: The Future Of B30 Biodiesel In Indonesia

Plantation – Singapore - UOB Kay Hian Research | SGinvestors.io WILMAR INTERNATIONAL LIMITED (SGX:F34) BUMITAMA AGRI LTD. (SGX:P8Z) FIRST RESOURCES LIMITED (SGX:EB5) GOLDEN AGRI-RESOURCES LTD (SGX:E5H)

Plantation – Singapore - The Future Of B30 Biodiesel In Indonesia

  • Biodiesel production in Indonesia increased 6% m-o-m and 38% y-o-y in May 19 amid the current B20 biodiesel blending mandate. Domestic consumption is expected to increase to 9m KL in 2020 (2019E: 6.2m KL) if the B30 blending mandate kick-starts in Jan 20.
  • Singapore companies with biodiesel plants will benefit from the higher biodiesel mandate, which will lead to higher utilisation of their biodiesel plants and higher earnings contributions.
  • Maintain MARKET WEIGHT.



WHAT’S NEW


Contribution of B30 biodiesel.

  • The Indonesia government targets to implement B30 palm oil-based biodiesel in Jan 20. With the increase from B20 biodiesel blending to B30, companies with biodiesel operations would benefit with higher mandated biodiesel allocation and thus higher utilisation rate. However, the positive contribution from B30 biodiesel mandates only contributes about 2% of their total net profit.

Indonesia biodiesel production increased 6% m-o-m in May 19.

  • According to Indonesia Biodiesel Production Association (APROBI), Indonesia biodiesel production increased by 6% m-o-m in May and stood at 4.2m kilolitres (KL) in 5M19 ( >100% y-o-y).
  • Domestic consumption had also increased significantly to 639,797 KL (+8% m-o-m, +86%yoy) with the strong domestic demand along the implementation of B20 palm oil-based biodiesel to the public service obligation (PSO) and non-PSO segments.

Looking forward to B30 biodiesel.

  • Indonesia has started to test B30 biodiesel in cars and trucks in Jun 19, according to its energy ministry. The test will be conducted over the next four months where the cars will cover 50,000 km and trucks will cover 40,000 km during the road test.
  • With the B30 biodiesel implementation, biodiesel consumption in Indonesia would increase to 9m KL in 2020 from an estimated of 6.2m KL in 2019. The state electricity company (PLN) in Indonesia is also ready to use B30 palm oil-based biodiesel in their power plants. PLN is currently using B20 biodiesel in its power plants.

Marginal positive contribution to companies’ earnings.

  • With the increment of palm oil usage in biodiesel, there would be a positive contribution to companies’ earnings in their downstream segment. However, this positive contribution to companies’ earnings would be very minimal as biodiesel only contributes about 2% to the companies’ net profit.

Allocation to Singapore companies.



ACTION


Maintain MARKET WEIGHT.

  • We maintain our view that CPO prices in 2H19 will be stronger on the back of:
    1. lower production,
    2. strong demand for biodiesel,
    3. lower soybean crushing, and
    4. lower rapeseed and canola production.
  • However, we are reviewing our average CPO price assumption of RM2,350/tonne and will probably revise it down to RM2,200-2,250/tonne in the view of lower average CPO prices in 1H19.


ESSENTIALS


More financially viable for biodiesel.

  • Biodiesel prices in Jul 19 stand at Rp6,970/litre and the subsidised diesel prices is at Rp7,800/litre, resulting in a wide discount of Rp820/litre between biodiesel and diesel. The palm oil-gasoil (PO-GO) spread has also widened with a discount of around US$130/tonne, which has made biodiesel more financially viable.

Companies might increase their biodiesel plant capacities in Indonesia.

  • Most Indonesian companies might build new biodiesel plants or to increase their biodiesel plants’ capacities in Indonesia due to the B30 biodiesel blending mandate target to be implemented in 2020. With the current B20 biodiesel blending mandate, the companies’ current biodiesel plants’ utilisation rates are near 100%.

Higher biodiesel demand.

  • Domestic biodiesel consumption is at 3.2m KL, which is 1m KL higher than the mandated 5M19 biodiesel allocation is at 2.2m KL. This is mainly due to the wide discount between biodiesel and diesel prices, which creates higher demand for biodiesel - even for non-mandated biodiesel.


ASSUMPTION CHANGES

  • We are reviewing our average CPO price assumption of RM2,350/tonne and will probably revise it down to RM2,200-2,250/tonne amidst the lower average CPO prices in 1H19. We foresee higher CPO prices in 2H19 as inventories are drawn down on lower production growth expected for 2019.
  • Based on earnings sensitivity, every 5% drop in CPO prices would affect companies’ earnings by 10-15%.


SECTOR CATALYSTS


Higher-than-expected biodiesel usage.

  • 2019 should see higher biodiesel usage, supported by the expanded biodiesel mandates in Indonesia and Malaysia. The Indonesian government may increase the biodiesel mandate to B30 blending (from B20) in early-20. If the mandate increases to B30 in Indonesia, blending volume is likely to increase by an additional 3m KL per year (2019F: 6.2m KL).
  • Based on Indonesia Biofuels Producer Association (APROBI) data, Jan-Feb 19 domestic biodiesel usage was 1.38m KL and exports was around 1.04m KL.


RISKS

  • Higher-than-expected CPO production.
  • Weakening crude oil prices.
  • Changes in government policies





Leow Huey Chuen UOB Kay Hian Research | Jacquelyn Yow UOB Kay Hian | https://research.uobkayhian.com/ 2019-06-27
SGX Stock Analyst Report BUY MAINTAIN BUY 3.900 SAME 3.900
BUY MAINTAIN BUY 0.810 SAME 0.810
HOLD MAINTAIN HOLD 1.700 SAME 1.700
SELL MAINTAIN SELL 0.210 SAME 0.210



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