Regional Plantation Companies - UOB Kay Hian 2021-10-14: Another Surprise Import Duty Cut By India

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Regional Plantation Companies - Another Surprise Import Duty Cut By India

CPO prices hit a record high yesterday with 3-month futures prices closing at RM5,015/tonne. This was mainly boosted by the import duty cut by India to a record-low level since 2015 and market rumours on China’s aggressive purchase over the last few days.
We are concerned over the sustainability of the current demand as the inventory in India and China has been replenished. Maintain UNDERWEIGHT.

CPO prices hit another new high with 3-month futures prices increasing by RM160/tonne to close at RM5,015/tonne on 13 Oct 21. CPO prices surged despite soybean oil prices weakening after the US$A WASDE report was released on 12 Oct 21, which revised up the end stocks for soybean and soybean oil.
Another surprise import duty cut by India to historical low. India makes another surprise move by cutting the import duty on vegoil again. As India is the largest export market for palm oil, the reduction of import duty would be supportive to the palm oil market. This is the fifth change to Indian vegoil import duty in 2021 with the new duties on CPO, Refined Palm Oil (RPO), soybean oil (SBO) and sunflower oil (SFO) reduced to the lowest level since 2015. High inflation as a result of high food prices and weaker-than-expected local oilseeds supplies could have triggered this change. Indian edible oil import for Sep 21 was a record-high at 1.7m tonnes (+66% y-o-y) and this also led to a record-high stock position of about 2m tonnes at ports and pipelines.

Based on media highlights, President Joko Widodo of Indonesia plans to stop the export of CPO so that the commodity can be processed into value-added derivative products. However, this is not a new proposal where Indonesia is moving more into value-added products by introducing higher duty and levy on crude palm products vs refined palm products. In 2020, total CPO was about 21% of total palm oil exports but dropped to 9% for Jan-Aug 21.
If the CPO export ban happens, refiners in Indonesia may have a large say in terms of pricing, but the ban could be slightly negative to pure upstream players. The key callenge to this is the welfare of smallholders, which makes up about 45% of total oil palm planted areas in Indonesia.

We keep our CPO price forecast for 2021 and 2022 at RM3,300 and RM2,800/tonne respectively, but see upside potential due to tight global edible oil supplies while demand is still relatively stable despite high prices.
For Jan-Sep 21, the average price reported by MPOB was at RM4,207/tonne and the average for 2021 could come higher given CPO prices were traded between RM4,747- 5,072/tonne for 1-12 Oct. However, the net price that will be reported by most of the plantation companies will still be lower than RM4,000/tonne due to the forward sales contracts and the impact from the exports levy and duty in Indonesia.
For companies under our coverage, only Hap Seng Plantations (HAPL MK) managed to report ASPs which are closer to the CPO price reported by MPOB.

Maintain UNDERWEIGHT. We believe CPO prices may sustain at these levels due to the continued disappointing palm oil production as yield recovery from the previous drought is taking longer than expected and there is a lack of workers in Malaysia. Other edible oil supplies remain tight as well and the upcoming La Nina posts another risk to the next planting season in South America.
Should the high prices remain for longer periods, pure upstream players would have higher leverage and beta to the CPO uptrend. Among companies under our coverage, Kim Loong Resources (KIML MK), Sarawak Oil Palm (SOP MK ), Hap Seng Plantations (HAPL MK), TBLA IJ and AALI IJ are those with high beta to CPO prices.
Investors with appetite for good dividend yield may consider to HOLD those plantation companies with potential to declare good dividend from their strong cashflow (low gearing).
Plantation companies with high dividend yield: Kim Loong Resources (KIML MK), Hap Seng Plantations (HAPL MK), Sarawak Oil Palm (SOP MK), KLK (KLK MK), First Resources (SGX:EB5).
Plantation companies with at least 50% dividend payout: Kim Long Resources (KIML MK), Hap Seng Plantations (HAPL MK), Sime Darby Plantations (SDPL MK), First Resources (SGX:EB5).

Rising fertiliser cost. Global fertiliser prices surged significantly due to:
1. supplies constraints,
2. better demand as agri-commodity prices improve, and
3. logistic bottlenecks.
As fertiliser cost (30% of ex-mill cost) is one of the biggest components besides labour cost, the surge in fertiliser prices could lead to a cost increase of at least 15-20% cost increase if production fails to catch up again.
Crop losses due to worker shortage, especially for Malaysian-based companies. Approval has been granted to bring in 32,000 foreign workers as early as end Oct-21, but this is not able to solves problem in the immediate term. Companies may continue to suffer from crop losses and loss of potential revenue.

Leow Huey Chuen UOB Kay Hian Research | Jacquelyn Yow Hui Li UOB Kay Hian | https://research.uobkayhian.com/ 2021-10-14

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