Agribusiness - CGS-CIMB Research 2019-08-27: Additional 5% Duty On Malaysian Palm Oil?

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

Agribusiness - Additional 5% Duty On Malaysian Palm Oil?

India's Director General of Trade Remedies (DGTR) is recommending a 5% increase in duty on RBDPOs imports from Malaysia.
We view this as negative for Malaysian palm oil refiners as it would erode their competitiveness, as well as profit margins.
Maintain NEUTRAL.

India’s Director General of Trade Remedies (DGTR) has recommended an increase in the rate of customs duty by 5% on imports of Refined Bleached Deodorised Palm Oil and Refined Bleached Deodorised Palmolein (RBDPOs) originating in Malaysia for a period of 180 days (approximately 6 months) to safeguard the interests of India’s domestic refining industry. A notification issued by DGTR yesterday has provisionally concluded that Malaysian imports were significantly undercutting prices in the domestic industry.
According to the DGTR, Indian producers who used to refine imported crude palm oil were not able to recover even their processing costs if they were to match prices of imported refined palm oil. Thus, the DGTR concluded that critical circumstances exist in which a delay in the imposition of safeguard measures will cause irreparable damage to domestic producers.

In Jan 2019, India cut import duty on refined palm oil shipments to 50% from 54%. Malaysian shipments of refined palm oil attracted only a 45% duty instead of 50% due to the Comprehensive Economic Cooperation Agreement signed by the two countries nearly a decade ago. The change in duty structure reduced the effective duty difference between crude palm oil (CPO) and refined palm oil for Indian refiners to 5.5% from 11% for palm oil shipments from Malaysia, making the purchase of refined palm oil in India more lucrative than CPO.
Rising shipments of refined palm oil from Malaysia have hit Indian palm oil refiners, according to the Solvent Extractors' Association of India (SEA), which subsequently filed an application with the DGTR for an investigation.

Malaysia’s share of India’s total refined palm oil imports was about 804,528 tonnes or 87% of India’s total edible oil imports in April to June 2019. Malaysian total palm oil exports to India rose 100% and accounted for 28% share of 7M19 total exports.
We are negative on this development as it is likely to erode Malaysian palm oil refiners’ competitiveness against their Indonesian and Indian peers, as the margin advantage they enjoyed from the 5% pts lower import duty could be removed if the recommendation was applied. This could potentially lower Malaysian palm oil export volumes to India, and lead to higher palm oil stocks, which is negative for CPO prices. This could also potentially narrow the CPO price premium gap between Malaysian and Indonesian CPO prices.

This news is negative for Malaysian palm oil refiners, such as Mewah International, as well as integrated palm oil players with refining capacities in Malaysia, like Sime Darby Plantations, KL Kepong and IOI Corporation, Wilmar, Genting Plantations and Sarawak Oil Palms. However, the impact on Wilmar could be buffered by its exposure to Indian refiner Adani-Wilmar, in which it has a 50% stake.

The attraction of First Resources lies in its strong output growth prospects due to its young estates and undemanding valuation at 13.7x P/E for FY20.

We like Wilmar for its attractive valuations and plans to unlock value via the listing of its China operations, potentially in 2H19.

Ivy NG Lee Fang CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-27

SGX Stock Analyst Report ADD MAINTAIN ADD 1.760 SAME 1.760

ADD MAINTAIN ADD 4.580 SAME 4.580