According to a Chinese media report, government has abandoned the recent foreign labour duty hike proposal. The foreign labour duty will remain unchanged as per the old rates for now. However, our channel checks reveal that the cabinet has earlier already approved the foreign labour duty hike, which will be lower than the recent hike. This should bring some cheers to the local plantation players as the labour duty hike could raise their operating costs by 2-8% depending on their workforce size in Malaysia. We retain our Outperform call on the sector outlook. Our preferred exposure is the upstream plantation players, namely, Genting Plantations, Ta Ann, TSH Resources and TDM.

• To recap. In early-Feb, government has decided to revise the foreign labour levy structure, which will see a staggering increase of RM910 or 154% per worker. This would have a big impact on the labour-intensive plantation industry in which foreign labours make up about 80% of the total workforce in oil palm estates nationwide. Currently, labour cost represents about 25%-30% of the plantation companies’ operating costs. We estimate that the foreign labour duty hike could easily affect their earnings by 2%-8% depending on their workforce size in Malaysia.
• A small relief to the plantation players. The removal of foreign labour duty hike will ease the plantation players’ cost burden at least for now. A quick check on MYEG website, it has reverted to the old rates. However, our channel checks reveal that government will eventually revise higher the foreign labour duty albeit at a small quantum compared to the earlier hike.
• Foreign-worker hiring freeze remains the main issue. Plantation companies, who are currently experiencing labour shortage in Malaysia, have another headwind to deal with given the recent suspension of foreign workers’ recruitment. It will be quite a big blow to their productivity when the low production cycle period is over as more workers are needed to handle the mounting production.
• March inventory data will be in focus. We believe there will be steeper decline in March inventories as CPO exporters are likely to flush out their inventories this month before the resurgence of CPO exports duty. Over the next few months, CPO prices are likely to touch as high as RM2,800/mt once the inventories fall below psychological level of 2m mt.

Source: PublicInvest Research - 14 Mar 2016