Plantation – Singapore - UOB Kay Hian 2020-04-06: Downside Risk If Indonesia Restricts Movements

GOLDEN AGRI-RESOURCES LTD (SGX:E5H) WILMAR INTERNATIONAL LIMITED (SGX:F34) FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z)

Plantation – Singapore - Downside Risk If Indonesia Restricts Movements

FFB production and domestic biodiesel demand would be impacted if Indonesia imposes movement controls. In our earnings sensitivity test, we found that companies will remain profitable at CPO ASP of RM2,400/tonne with 5% lower FFB production and 15% higher cost of production.
If ASP goes lower, Golden Agri Resources (SGX:E5H) may be loss-making, while First Resources (SGX:EB5) is relatively more resilient to CPO price downside risk.

Indonesia is preparing to impose movement controls after the President announced that Indonesia is now under a public health emergency to combat the COVID-19 pandemic.
We understand that there is no limitation on plantation operations so far as most of the plantation estates are outside of Jakarta (which is the epicentre of the outbreak). However, we remain concerned over the impact on FFB and CPO production in Indonesia if the number of COVID-19 cases continues to increase and further affect plantation operations.
From our channel checks, we understand that a small group of companies has started to take more measures by reducing their manpower at each shift. However, this is not expected to lead to a major production destruction in Indonesia at this point of time.

For the plantation companies under our coverage, we did an earnings sensitivity analysis based on different scenarios. We assume:
- lower FFB production for 2020;
- higher cost of production; and
- lower CPO prices.

Plantation companies would remain profitable assuming CPO ASP at RM2,400/tonne (US$585) with 5% lower FFB production and 15% higher cost of production in our base case scenario.
If ASP falls to RM2,200/tonne (US$537), Golden Agri Resources (GGR) could report a core net loss due to its higher cost of production at about US$300/tonne, higher gearing, older tree age and aggressive replanting that limits production growth prospects. Further to that, its downstream operation is more volatile.

Based on our sensitivity analysis, First Resources would be more resilient, given its lower cost of production and it could still see marginal production growth from its young estates in Kalimantan.
We like First Resources (BUY/Target: S$1.70), given its relatively more resilient earnings prospects and low gearing.
We also have a BUY on Bumitama Agri (SGX:P8Z) (BUY/Target: S$0.60) as is it currently trading at EV/ha of S$7,517, almost half of the replacement value.

With the sharp drop in crude oil prices, the ability of Indonesia to carry out the 30% biodiesel blending (B30) programme is the key concern now. The market is concerned whether the CPO fund for biodiesel incentive is sufficient if the palm oil and gasoil (POGO) spread continues to widen.
Based on our assumption, we reckon the CPO fund is sufficient up to 2Q20. Further to that, demand for biodiesel might be hampered due to lower diesel consumption as transportation will be restricted if movement control is imposed in Indonesia.
Assuming one month of blending volume loss if the movement control is introduced, this would translate into about 800,00kl or an 8% drop to the estimated total biodiesel demand of 9.6m kl. If this happens, Wilmar (SGX:F34), First Resources and Golden Agri Resources would be impacted, albeit minimal (less than 1%) as biodiesel operation contributes a very small portion to their operating profit.

Palm oil production would be heavily impacted if the Indonesia government implements a lockdown due to the increasing number of Covid-19 cases.

Leow Huay Chuen UOB Kay Hian Research | Jacquelyn Yow UOB Kay Hian | https://research.uobkayhian.com/ 2020-04-06

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