FIRST RESOURCES LIMITED (SGX:EB5)
BUMITAMA AGRI LTD. (SGX:P8Z)
Regional Plantations - COVID-19 ~ Indonesia Cuts Corporate Tax Rates
Some relief for Indonesia-based planters
- With the exception of First Resources (SGX:EB5) and Bumitama Agri (SGX:P8Z), given the relatively low profit contribution from Indonesia operations to the other listed planters under our coverage, the positive impact of the lower Indonesia corporate tax rate will be relatively muted. We are keeping our earnings forecasts for now.
- Our 12M NEUTRAL sector view is unchanged but values can be found among the SMID caps, which trade at or near GFC trough PBV (see Regional Plantations - Maybank Kim Eng 2020-03-11: Value Re-emerging In Small/Mid Caps).
- Our preferred BUYs are KLK, First Resources (SGX:EB5), Bumitama Agri (SGX:P8Z) and SOP.
- SELL GENP.
Indonesia accelerates tax reform
- Indonesia’s latest stimulus package to counter COVID-19 impact included a proposal to cut corporate income tax rate to 22% for 2020-21 and 20% for 2022 and onwards (see Indonesia Strategy: Enough pain on the street?).
- All else constant, mathematically, the lower corporate tax rate in 2020-21 will lift the bottom line of Indonesian plantation companies by up to 4%.
Tax benefits vary across plantation companies
- Among the stocks in our coverage, the SGX-listed planters – First Resources (SGX:EB5) and Bumitama Agri (SGX:P8Z) have 100% of their operations in Indonesia. They will stand to benefit the most from the corporate tax reduction. Among the Malaysian planters under our coverage, those with exposures in Indonesia (oil palm planted area as a % of group) are TSH (BUY; 85%), GENP (SELL; 59%), KL Kepong (BUY; 54%), SDPL (HOLD; 34%), IOI (HOLD; 11%) and THP (HOLD; 3%) – BPLANT (BUY), SOP (BUY), and TAH (BUY) have 100% of their operations in Malaysia.
- However, the tax benefits will not be proportionate to their planted area nor their production contribution to the group as the profitability of each estate is dependent on its tree age profile and productivity. Those with an average tree age profile of < 8 years are likely to be loss making or just breakeven after taking into account depreciation and interest costs.
- Meanwhile as group tax relief are usually not available (ie profits from one subsidiary cannot be offset against losses of another subsidiary), the tax benefits are therefore also not symmetrical across the group.
While positive, the impact to bottom line is muted
- At the time of writing, only SDPL, KLK and GENP have responded to our query. In terms of PBT contribution, 35% of SDPL’s group PBT is derived from Indonesia, KLK at ~28% while GENP is still loss making. By our estimate, IOI and THP are likely to be recording small losses in Indonesia given their young tree age profile of < 5 years.
- For loss making entities, the lower corporate tax benefits will not accrue to them immediately, but in the future. Nonetheless, they can potentially recognize deferred tax assets (ie tax credits) on those accumulated unutilized tax losses only if the loss making entities have the potential to turnaround in the future to utilize those losses.
Ong Chee Ting CA
Maybank Kim Eng Research
|
https://www.maybank-ke.com.sg/
2020-04-03
SGX Stock
Analyst Report
1.850
SAME
1.850
0.780
SAME
0.780
