Regional Plantations - UOB Kay Hian 2021-06-29: Official Announcement Of Indonesia’s Lower Export Levy

FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z) GOLDEN AGRI-RESOURCES LTD (SGX:E5H)

Regional Plantations - Official Announcement Of Indonesia’s Lower Export Levy

Indonesia’s Ministry of Finance has issued a revised regulation on palm oil export levies, which would take effect from Jul 21. This is within our expectations as we had highlighted in our previous reports, and would boost upstream players’ earnings by 20- 30%.
Having said that, we only expect a short-term lift to share price performance due to CPO price weakness and foreign funds trimming their positions in the plantation sector due to ESG concerns.
Maintain MARKET WEIGHT.

Indonesia’s Ministry of Finance has issued a revised regulation on palm oil export levies dated 25 June 21, and the new levy will take effect seven days after. The new CPO export levy structure now entails a US$20/tonne increase in export levy for every US$50/tonne increase in palm oil prices (previously: export levy would increase by US$15/tonne for every US$25/tonne increase in palm oil prices). This is positive to the upstream players.
Based on our back-of-the-envelope calculation, pure upstream players would enjoy additional 20-30% net profit with the new export levy. Downstream will also enjoy the benefit of lower duty but the duty spread to crude products will be smaller, ie the margin could be slightly lower (please refer to the table overleaf for the revised palm oil export levy structure).

The downward revision should not raise any concerns on the Indonesia government’s ability to continue supporting the biodiesel mandate.
Based on media reports, Indonesia’s Palm Oil Plantations Fund Management (BPDP) had a total fund surplus ~Rp1t as at end-Mar 21, and with monthly collections of Rp6t-7t for last six months vs payments of Rp3t-4t, the surplus could have grown further. We have done a simple calculation and believe that BPDP will still be able to fully support the B30 biodiesel programme.

With the official announcement that the downward revision in palm oil export levy will take effect from Jul 21, most companies with exposure to Indonesia would see an uplift in share prices. This is mainly because the upstream players will get some relief from the lower palm oil export levy and hence see higher net realised selling prices and better earnings for 2H21. We thus expect more potential upside for pure upstream players under our coverage, such as Bumitama Agri (SGX:P8Z), First Resources (SGX:EB5), Astra Agro Lestari (AALI IJ) and London Sumatra (LSIP IJ).
Having said that, we only expect a short momentum upside from the announcement for investors to factor in the potential earnings upside. We expect the plantation sector to continue underperforming in 2H21 due to weakness in CPO prices and other vegoil supply coming on-stream. Further to that, foreign funds have also been trimming their positions in plantation sector due to environmental, social and governance (ESG) concerns.
Based on the potential revision of the palm oil export levy, we estimate a 4.9-32.8% potential upside to earnings. As the revised palm oil export levy will be implemented starting from Jul 21, see table in the PDF report attached below for the impact on earnings and fair value of plantation stocks.

We maintain our CPO price assumptions of RM3,000/tonne and RM2,600/tonne for 2021 and 2022 respectively.

Leow Huey Chuen UOB Kay Hian Research | Jacquelyn Yow Hui Li UOB Kay Hian | https://research.uobkayhian.com/ 2021-06-29

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