Danareksa Equity Snapshot – Plantation Sector (OVERWEIGHT) Indonesia CPO Export Levy Waiver | November 27, 2018 11:00 WIB
We believe the impact of Indonesia’s decision to temporarily waive the CPO export levy is neutral. The decision will likely favour Indonesian planters at the expense of Malaysian planters. Although this move may not create positive sentiment on B20 implementation, we believe that the Indonesia Estate Crop Fund will have enough funds to support the B20 program for at least 1 year. Maintain Overweight.
Indonesia temporarily waives the CPO export levy. According to the local press, the Indonesian government has decided to temporarily waive the CPO export levy (from USD50/ton) in an attempt to prevent the CPO price from falling further and support local farmers. No levy will be imposed if the CPO price falls below USD500/ton. If the CPO price hovers between USD500-549/ton, a USD25/ton levy will be imposed and subsequently if the CPO price is above USD549/ton, a USD50/ton levy will be applied. The policy will take effect as soon as the Ministry of Finance has issued the regulation.
A double-edged sword? We believe the impact of this move is likely to be neutral. The CPO export levy waiver is likely to benefit Indonesian planters. Assuming that exporters bear the levy charges, exporters could enjoy USD50/ton in savings. However, if the levy charges are passed on, buyers could purchase Indonesia CPO at a USD50/ton lower price. Based on our calculations, the decision to waive the USD50/ton levy would increase AALI’s FY19 earnings by 27.6%, LSIP’s FY19 earnings by 28.7% and SGRO’s FY19 earnings by 34.9%.
On the other hand, the export levy waiver will make Malaysia’s palm oil less competitive compared to Indonesia’s palm oil. In this sense, Malaysia could lose its palm oil buyers to Indonesia and cause the Malaysia-based CPO price, often used by the market as the benchmark price, to correct.
Is B20 implementation still viable? In our view, the decision to waive the CPO export levy will not create positive sentiment on B20 implementation, especially with the trend of falling crude oil prices. Declines in the crude oil price have reduced the attractiveness of biodiesel usage and incentives might be needed to ensure successful implementation of B20. We note that a USD0/ton levy would also mean that no funds would be collected by the Indonesia Estate Crop Fund.
However, we believe that funding from the Indonesia Estate Crop Fund will not be an issue for now and that they could support the B20 program for at least 1 year. We estimate that there is over USD1bn of leftover funds. Assuming that IDR9.1tn of funds are allocated for biodiesel incentives, a CPO price assumption of MYR2,550/ton and a Brent oil price of USD65/bbl, we calculate that the volume of incentivized biodiesel would reach 5.8mn KL or equivalent to 5.0mn tons of CPO demand.
Maintain overweight. At this juncture, we maintain our overweight call on the plantation sector with LSIP as our top pick. We reiterate our positive view on the CPO price outlook mostly due to the expectation of stronger demand from B20 implementation.