SINGAPORE (Dec 6): CGS-CIMB Securities is maintaining “neutral” on the Asean agribusiness sector as Indonesia revises its export levies on palm oil and its derivative products, following a drop in crude palm oil (CPO) prices.
Under the revised ruling, the country’s government will not collect levies from palm exporters when prices are below the threshold of US$570 per tonne, but will charge US$10-25 a tonne once prices are in a range of US$570-619 per tonne. This levy will rise to US$20-50 should prices hit above US$619 per tonne.
Under the previous rules for levies, exporters paid US$20-50 per tonne regardless of palm price levels.
In a Wednesday report, analyst Ivy Ng says she regards this news as positive for upstream planters with exposure to Indonesia, as the revision in export levy rates could help support CPO prices at their current levels.
However, Ng does not expect on FY19F-20F net profit for planters – and cautions that the news is negative for Indonesian downstream processors as the revised levy at lower CPO prices will erode their margin advantage, which is currently the prices difference between CPO and processed palm products.
“We maintain our view that the removal of export levy will raise the competitiveness of Indonesian palm oil product exporters as they would have saved between US$20-50 per tonne export tax when CPO price is below US$570 per tonne. The bulk of the savings is likely to flow back to the Indonesian farmers via higher domestic CPO prices,” says Ng.
“However, should there be an acute excess supply of palm oil in the global market, the benefits maybe accrued to importers via lower prices. This should help narrow the selling price gap between Indonesian and Malaysian CPO products, which have expanded to RM420 (US$100) per tonne in 3Q18, back to possibly around US$30-50 per tonne over time,” she adds.
With that in mind, the analyst highlights First Resources as an attractive “add” stock pick for its strong output growth prospects due to its young estates, as well as for its undemanding valuation of 13 times P/E for CY18F. The stock has been given a target price of $2.08.
Another preferred agribusiness play is Wilmar International, which has been rated “add” with a target price of $4.10.
“We like Wilmar due to its attractive valuations and plans to unlock value via the listing of its China operations by 2H19,” says Ng.
As at 11:56am, shares in First Resources and Wilmar International are down by 5 cents and 1 cent at $1.57 and $3.13, respectively.