Regional Plantations - Maybank Kim Eng 2020-06-12: Indonesia Sending Positive Signal On Its B30 Commitment

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

Regional Plantations - Indonesia Sending Positive Signal On Its B30 Commitment

Government of Indonesia (GOI) is serious on B30

  • The GOI is signaling its commitment to sustain its B30 programme despite recently widened POGO spread that requires bigger subsidies. It recently increased export levies and lowered conversion payments to biodiesel producers.
  • We make no changes to our earnings forecasts and CPO ASP forecast of MYR2,300/t for 2020 (YTD: MYR2,491/t). We expect the overall impact from the above measures to be net-neutral on earnings.
  • We maintain NEUTRAL on the sector.
  • Preferred BUYs remain with 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.

Beefing up CPO Fund

  • After considering several proposals in consultation with industry players, the government of Indonesia (GOI) has finally set in motion two new measures (effective 1 June) to ensure Indonesia’s existing B30 mandate is sustained amidst widened palm oil-gas oil (POGO) spread, largely due to low crude oil price. New measures include:
    1. raising the export levy of palm oil prices by USD5/t across all palm products. CPO exports is now at USD55/t (previously USD50/t) while those of processed PO are taxed at USD25-35/t (previously USD20-30/t). We estimate the hike in export levies alone may raise the annual levy collection by ~USD150m p.a.. The government has also abolished the minimum threshold for the imposition of export levy;
    2. The Indonesian biodiesel producers will get a lower processing conversion payment of USD80/t (-USD20/t; previously USD100/t) from the GOI. And we estimate this could save the CPO Fund ~USD160m p.a.

GOI is also allocating some from state budget

  • We understand from industry players that the above measures will be dynamic in nature and may continue to be adjusted (if necessary) as the GOI is committed to the B30 mandate. In addition to the above new measures, it was also reported by Reuters back in May that the GOI is allocating Rp2.78tr (USD187m) from the state budget to help fund B30.

Overall impact should be net-neutral on earnings

  • In theory, the increase in export levies will hurt the sales receipt of Indonesian growers by USD5/t. But the benefits in ensuring the success of B30 (ie take up for palm oil for biodiesel) should outweigh the USD5/t cost in that CPO price should be better supported or possibly even trend higher (when stockpile is low) with the B30 mandate in place.
  • As for downstream players, their margins (with the exception of participating biodiesel producers) will not be affected as the differential export levies between processed and crude palm oil remain unchanged. However, the Indonesian biodiesel producers who participate in the B30 mandate will receive USD20/t lower processing conversion payment (to USD80/t) by the GOI. This will reduce the margins of biodiesel producers, but mitigated by lower methanol cost (due to lower crude oil price, and is a key component cost in biodiesel processing).

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-06-12
SGX Stock Analyst Report BUY MAINTAIN BUY 1.850 SAME 1.850