Investment Highlights

• There are many taxes and payments in the palm oil sector in Malaysia. In this report, we take a look at the various cess and tax payments that palm oil companies in Malaysia have to make. Palm oil companies in Malaysia pay: (1) MPOB cess; (2) CPO export tax (depending on the level of CPO prices); (3) CPO windfall tax (depending on the level of CPO prices); and (4) corporate taxes. Plantation companies in Sabah and Sarawak also have sales tax of 7.5% and 5.0% respectively. The corporate tax rate in Malaysia is 24% compared with Indonesia’s 22% in 2021F and 20% in 2022F.
   
• Rising operational costs. All of the above taxes are in addition to the yearly levy of RM640/worker for foreign workers in Malaysia and RSPO compliance costs. An industry player said that its RSPO compliance costs are about RM8.00 to RM12.00 per tonne of CPO.
   
• Taxes and cess are mainly based on revenue. The MPOB cess and the taxes are based on the revenue of the companies and not net profit. The exception is corporate tax. This means that plantation companies would still have to pay the MPOB cess and various taxes even though they may be unprofitable.
   
• CPO taxes are based on price, MPOB cess based on volume. The CPO export and windfall taxes are dependent mainly on the level of CPO prices while the MPOB cess is based on the volume of CPO and CPKO (crude palm kernel oil) production. Hence, there are higher cess payments if there is a larger volume of CPO and CPKO production regardless of CPO prices.
   
• CPO export and windfall taxes are paid monthly. The CPO export and windfall taxes are paid to the Customs Department. Both taxes are paid monthly. The CPO export tax is paid based on reference rates, which take into account the average CPO price from the 15th of the previous month to the 14th of the current month.
   
• Past yearly payments comprised mainly sales tax and cess. We estimate that the MPOB cess and various taxes were about RM60 to RM400 per tonne on a yearly basis (estimates are based on CPO volume in Malaysia only and not CPKO) from 2017 to 2019. These were about 1% to 7% of revenue. At the height of CPO prices in 2017 when there were also CPO export taxes and CPO windfall payments in Peninsular Malaysia, the payments were almost 6% to 7% of the plantation companies’ revenue.
   
• CPO export tax and windfall taxes were not significant from 2017 to 2019. Most of the payments in 2018 and 2019 comprised the Sabah sales tax and MPOB cess payments. Windfall tax payments were minimal as CPO prices did not cross the threshold levels of RM2,500/tonne in Peninsular Malaysia and RM3,000/tonne in East Malaysia in 2018 and 2019. Although CPO prices rose in late 2019, this took place only in the last month of the year. In most of the months in 2017, only companies in Peninsular Malaysia paid windfall taxes as average CPO prices exceeded the reference price of RM2,500/tonne. In Malaysia, the windfall tax kicks in when CPO prices exceed the reference prices of RM2,500/tonne in Peninsular Malaysia and RM3,000/tonne in Sabah and Sarawak.
   
• High CPO prices would translate into high taxes in 2021F. If CPO prices stay above RM3,000/tonne consistently throughout 2021F, we estimate that the MPOB cess and various taxes would be about RM300 to RM500/tonne. These would roughly be 2% of 8% of the revenue of the companies in our coverage. The estimated payments are inclusive of the windfall tax and CPO export tax. We assumed a CPO export tax rate of 7.5% on an average CPO price of RM3,300/tonne for this calculation.
   
• Lower taxes if CPO prices soften. If we assume that CPO prices would only exceed RM3,000/tonne in 1Q2021 before tapering off in the subsequent quarters, we think that the MPOB cess and taxes would be about RM200 to RM320/tonne. These would roughly be 1% to 5% of the companies’ revenue in 2021F. Currently, our average CPO price assumption for Malaysia in 2021F is RM2,500/tonne (2020: RM2,765/tonne).
   
• MPOB cess is used to finance MPOB activities. In Malaysia, palm oil companies pay a cess of RM14/tonne to the MPOB. The cess is used mainly to fund the MPOB’s R&D and palm oil promotional activities. Included in the RM14/tonne cess is a cess of RM1.00/tonne for the government’s environmental fund for tree planting. This took effect 1 January 2020. In December 2020, the MPOB proposed an additional cess of RM5/tonne for R&D in the mechanisation and automation processes of palm oil. The additional cess of RM5/tonne would only be for a year. The Malaysian Estate Owners Association (MEOA) has appealed for the additional cess of RM5/tonne to be delayed.
   
• What are the palm oil taxes in Indonesia? In Indonesia, there are two major taxes paid by the palm oil companies i.e. CPO export tax and CPO export levy. The CPO export levy is used to fund the country’s biodiesel programme while the CPO export tax goes to the Indonesia government’s coffers.
   
• CPO export tax and levy in Indonesia are based on the level of CPO prices. The CPO export tax and CPO export levy are based on a progressive scale of prices. Hence when CPO prices increase, the CPO export tax and levy would go up. The CPO export tax in Indonesia kicks in when CPO prices exceed the US$750/tonne threshold. The CPO export levy is US$55/tonne if CPO prices are below US$670/tonne level.
   
• CPO export tax and levy reduce the realised CPO price in Indonesia. The CPO export tax and levy are net of the spot CPO prices in Indonesia. Hence, the CPO export tax and levy widen the price disparity between Indonesia and Malaysia. Upstream companies in Indonesia would record lower CPO prices compared to their Malaysian peers. On the other hand, due to the lower palm product prices, downstream companies (refining and oleochemicals) in Indonesia would enjoy higher processing margin compared to their Malaysian counterparts.
   
• In spite of the taxes in Malaysia, there will still be earnings growth in 2021F. We believe that the MPOB cess and various taxes would eat into the cash flows and net profit margin of the planters. However as long as CPO production recover and CPO prices exceed the companies’ all-in production costs of RM2,000/tonne to RM2,300/tonne, most of the palm oil companies in our coverage would still record net profit growth of more than 5% in 2021F. We estimate FFB production growth of 1% to 10% in FY21F for the companies in our coverage.
   
• We are NEUTRAL on the plantation sector in 1H2021. At a CPO price of more than RM3,000/tonne, we believe that there is more downside risk than upside. Global palm production is envisaged to rebound in 2021F after being affected by 2019’s haze and drought, in 2020E. Oil World has forecast CPO production to increase by 8.2% in Indonesia and 1.4% in Malaysia in 2021F. In addition, there is risk that high CPO prices may affect palm demand going forward due to the small price discount of 7.7% or US$71/tonne with soybean oil.

Source: AmInvest Research - 26 Jan 2021