Regional Plantations - Maybank Kim Eng 2020-11-21: Indonesia’s Export Levy Conundrum Seen Hurting Upstream More

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

Regional Plantations - Indonesia’s Export Levy Conundrum Seen Hurting Upstream More

Take shelter in integrated players

  • While the Indonesian government is still deliberating on a potential revision to Indonesia’s export levy to raise funds to sustain its B30 mandate, the physical market (~MYR2,800/t) in Indonesia has reflected the proposed new levy since early Nov 2020 which is rather punitive on the upstream.
  • Integrated companies in Indonesian such as First Resources (SGX:EB5), KLK, SDPL and Wilmar (SGX:F34) should be relatively better off under current conditions.
  • Our sector NEUTRAL call is unchanged. Our top plantation BUYs: First Resources (SGX:EB5), KLK, SOP, BPLANT. SELL: GENP.

Indonesia mulls a progressive rate for export levy

  • Thanks to Indonesia’s persistence in keeping to its B30 mandate (which has kept stockpile low amidst weaker-than-expected 2020 Indonesia output), CPO price has been sustained above MYR3,000/t since early Nov 2020.
  • On the flip side, the CPO Fund (funded by its export levy) which subsidises Indonesia’s B30 mandate is now near zero as the current wide POGO (Palm Oil Gas Oil) spread that requires more than USD500/t of subsidy for every tonne palm biodiesel blended has exhausted the fund.
  • There have been various proposals in the past to increase the export levy to beef up the CPO Fund. Based on latest chatter, the new proposal involves increasing export levies by up to USD15/t for CPO and USD12.5/t for palm products for every USD25/t increase in CPO price). This progressive levy structure will replace the existing flat rate of USD55/t for CPO and USD25-35/t for palm products.

Newly proposed levy is taxing on upstream planters

  • While the Government of Indonesia is still mulling the new levy proposal, the physical market has priced it in as the net CPO price received by Indonesia upstream has been ~MYR2,800/t since early November. KPB Nusantara CPO Delivered Medan/Dumai was quoted at Rp10,003/kg or MYR2,877/t on 19 Nov (vs Malaysia’s MPOB spot price of MYR3,580/t).
  • Compared to the physical spot price in MY averaging ~MYR3,400/t in Nov 2020, the Malaysia-Indonesia discount has widened to ~MYR600/t (~USD145/t) from an average of ~MYR250/t (~USD59/t) in prior months. We believe this is because the market is worried that if the Government of Indonesia endorses this new levy, it may be applied retrospectively w.e.f. 1 Nov. This is rather punitive on upstream players while downstream players seem to be the immediate beneficiary as palm old prices were reported to have held up well at ~Rp12,045/kg (on Jakarta Futures Exchange) or ~MYR3,494/t equivalent.

Potential beneficiaries and losers of new levy

Potential beneficiaries -

  • Malaysia upstream planters’ net receipts will be incrementally better than Indonesia upstream planters if the new proposal is adopted. Note that Malaysia has a progressive tax rate too whereby upstream will incrementally pay more taxes to the government via windfall tax, export duty and State taxes;
  • On a relative basis, the Indonesia integrated players will be relatively better off than Indonesia upstream although the net receipts will still be lower than existing export levy rate.

Potential losers -

  • Indonesia’s upstream will suffer the most as the upside to CPO price is capped at ~MYR2,800/t under the new levy. While the above proposal is not cast in stone yet, we understand the Government of Indonesia will make a final decision in the coming weeks. For now, we find Indonesia’s integrated players more insulated than pure upstream players.

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-11-21
SGX Stock Analyst Report BUY MAINTAIN BUY 1.960 SAME 1.960