Regional Plantations - Maybank Kim Eng 2020-06-08: CPO Export Duty Exemption Till End-2020 Is A Positive Move

Regional Plantations - Maybank Kim Eng | SGinvestors.io FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z)

Regional Plantations - CPO Export Duty Exemption Till End-2020 Is A Positive Move

Industry given a much needed CPO export catalyst

  • The exemption of CPO export duty by the government of Malaysia (GoM) till Dec 2020 will be positive for CPO exports (especially to India) and will help support CPO price which is expected to be under pressure in 3Q20 due to the anticipated stockpile build-up amid seasonal production recovery. Malaysian (MY) growers will benefit at the expense of MY refiners. However, integrated players will be largely unaffected.
  • We maintain our NEUTRAL sector call and make no changes to our CPO ASP forecast of MYR2,300/t for 2020.
  • Our preferred BUYs are First Resources (SGX:EB5), Bumitama Agri (SGX:P8Z), Sarawak Oil Palms, Ta Ann and Boustead Plantation. SELL Genting Plantations and IOI Corp on rich valuations.

GoM exempts CPO and PKO export duties till Dec

  • Under the economic recovery plan announced on 5 June, the GoM is exempting 100% export duty on CPO from July to Dec 2020. It is also exempting crude palm kernel oil (PKO) and processed PKO, the by-products, during the same period.

Positive preemptive move to keep MY stockpile low

  • There is currently zero export duty for the month of June as the CPO price reference used to determine the duty was below the minimum threshold of MYR2,150/t. Nonetheless, the exemption of duty till Dec 2020 is a positive preemptive move as it will help to boost exports of CPO especially to India which has restricted the importation of refined palm oil since the start of 2020 to help India's refining industry.
  • India accounted for 15%/24% of MY’s total exports in 2018/2019. And MY’s exports to India has dipped 94% y-o-y for 4M20 to just 96,145t following the restriction. Recall also that MY’s substantial exports to India in 2019 came at the expense of Indonesia (ID) due to the slightly lower import duties imposed on MY palm oil origin as India honored its commitment made in a comprehensive economic cooperation agreement signed years ago. But that advantage disappeared in Sept 2019.
  • With this CPO export duty exemption till Dec 2020, we anticipate the move will help boost the price competitiveness of MY's CPO vis-a-vis ID producers. This will hopefully boost MY’s CPO exports to India in the coming months as MY enters into the seasonally high production months, capturing India’s pent up demand post lockdown and ahead of the Diwali festivity. More importantly, this will help keep MY’s anticipated stockpile build-up in 2H20 under control.

MY growers to benefit, MY refiners to lose

  • While MY growers are expected to benefit from this ruling, the losers will be MY refiners whom will likely lose price competitiveness vis-a-vis ID refiners. But the larger MY listed companies under our coverage (like Sime Darby Plantations, IOI Corp, Kuala Lumpur Kepong, Genting Plantations, and Sarawak Oil Palms) are integrated players (ie growers with downstream operations). Therefore the benefits accruing to their upstream divisions will offset potential losses at their downstream divisions, being net-net neutral.

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-06-08
SGX Stock Analyst Report BUY MAINTAIN BUY 1.850 SAME 1.850