Investment Highlights

• Indonesia bans exports of cooking oil and its raw materials. Reuters reported that Indonesia will ban exports of cooking oil and its raw materials from 28 April onwards until a date to be decided later. President Joko Widodo said that the country would continue to monitor and evaluate the policy until Indonesia has an “abundant and affordable” supply of cooking oil.

Comments:

• Negative for Indonesian planters but positive for Malaysia-based companies. We believe that domestic CPO prices in Indonesia would fall as palm supply increases. There is also uncertainty over the implementation of the B30 biodiesel policy as the absence of monies from the CPO export levy means that there will not be subsidies. Indonesian plantation companies such as Wilmar International and Golden Agri Resources will not be able to export their palm products. As such, the price difference between CPO in Malaysia and Indonesia may widen from RM1,000/tonne currently.

• Companies with significant exposure to Indonesia include KL Kepong (KLK), TSH Resources and Sime Darby Plantation (SDP). About 50% to 60% of KLK’s FFB come from Indonesia. Indonesia accounts for more than 90% of TSH’s FFB production. Indonesia made up 38.8% of SDPs upstream EBIT in FY21. Roughly 50% to 60% of Genting Plantations (GenP)’s FFB are from Indonesia. On the other hand, IOI Corporation and FGV Holdings do not have large exposure to Indonesia.

• Indonesia’s export revenue will drop with no subsidies for biodiesel. According to Statista, Indonesia’s palm exports were worth US$28.5bil in 2021. Also in March 2022, the president director of Indonesia Oil Palm Plantations Fund Management Agency said that 57.9 trillion rupiah (US$4bil) will be allocated for biodiesel in 2022F. The agency collected an estimated 71.6 trillion rupiah or US$4.9bil from the CPO export levy in 2021. In 1Q2022, the agency collected 12.5 trillion rupiah or US$861.8mil from the CPO export levy.

• Indonesia may reverse the ban. Indonesia implemented the domestic market obligation (DMO) policy of 20% in January 2022. The DMO was increased to 30% in early March 2022. Then in mid-March 2022, the DMO was scrapped but the CPO export levy was raised. To recap, under the DMO, a certain amount of palm shipments must be sold locally.

• Higher CPO prices. As the ban on cooking oil and its raw materials will only take place from 28 April onwards, we believe that Indonesia plantation companies will try to export as much as they can before the deadline. This may dampen CPO prices. However, after 28 April, CPO prices will increase.

• UNDERWEIGHT. We are keeping our UNDERWEIGHT stance on the sector for now. There is a possibility that Indonesia may still revise its policy as it decides on the best way to ensure abundant and affordable domestic supply of cooking oil without compromising its export revenue. We will be reviewing our CPO price assumption for 2022F, which is RM4,000/tonne currently.

Source: AmInvest Research - 25 Apr 2022