Plantation Companies - RHB Invest 2020-12-04: New Indonesian Export Levies From 10 Dec

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

Plantation Companies - New Indonesian Export Levies From 10 Dec

Stay NEUTRAL. The Indonesian Government’s export levy increase with effect from 10 Dec has a dual effect of ensuring the biodiesel mandate in 2021 is adhered to, and reducing realised CPO selling prices for pure or heavily exposed Indonesian planters.
Our BUY recommendations – First Resources (SGX:EB5), Wilmar International (SGX:F34), and Kuala Lumpur Kepong – however, should benefit from this move.

Export levies will be raised to a progressive system of USD55-255/tonne of CPO, depending on price levels. It previously imposed a flat USD55/tonne levy on CPO regardless of price. The new regulation stipulates that if the CPO reference price is USD670/tonne or below, the levy imposed will be USD55/tonne. Subsequently, it will increase by USD15.00 for every USD25.00 price hike in CPO.
For refined products and biodiesel, the increase for every USD25/tonne is smaller, at USD12.50/tonne.

This is to help to beef up the biodiesel fund, which is running low on funds. Based on this change, we estimate that the biodiesel fund would be able to support B30 output fully for 2021, even at the current POGO spread. This will provide significant support to CPO prices, as the biodiesel mandate execution is no longer in question.
For December, the Government has set the CPO reference price at USD870.00, which will mean the levy from Dec 10 will be USD180/tonne. This, together with the export taxes applicable for December of USD33/tonne, would mean upstream plantation players in Indonesia would receive a discount of as much as USD213/tonne for CPO sales for the month of December. This represents a discount of c.25% to current market prices.

For downstream players, the levy increase is lower at USD12.50/tonne for every USD25/tonne rise in CPO prices above USD670.00. This means that in the month of December, the levy borne by refiners would be much lower at USD130/tonne. This would result in margins for downstream players in Indonesia widening while margins for upstream planters would narrow.
Malaysian downstream competitors would also be at a disadvantage, given the price competition that Indonesian players would be able to provide with this extra USD50/tonne margin.

While we note that the increase in levies are punishing, we highlight that the realised selling prices in Indonesia even in 3Q20 have already been pricing in the soon-to-be higher taxes, with discounts to market prices of as much as 15-20%. This could be deemed negative for pure Indonesian upstream players like LSIP and Bumitama Agri (SGX:P8Z), or companies with heavy upstream exposure to Indonesia like TSH Resources (75%) and IJMP (59%).
However, companies with downstream exposure in Indonesia, like AALI, First Resources, GGR, KLK, SDPL and Wilmar International, would be better off in this scenario, as they would be able to channel more sales to its downstream capacities.
We stay NEUTRAL on the sector, with our BUY recommendations on First Resources, KLK and Wilmar reiterated, as beneficiaries of this change in levy structure.

Juliana Cai RHB Securities Research | Hoe Lee Leng RHB Invest | https://www.rhbinvest.com.sg/ 2020-12-04

SGX Stock Analyst Report BUY MAINTAIN BUY 1.450 SAME 1.450

BUY MAINTAIN BUY 5.800 SAME 5.800

BUY MAINTAIN BUY 0.600 SAME 0.600