- NST quoted sources as saying that effective 1 August 2013, the Sabah crude palm oil discount will narrow from RM100/tonne to RM80/tonne.

- NST also cited IJM Plantations CEO as saying that IJM Plantations has already sealed sales contracts with refineries in Sandakan for August 2013 with the revised discount.

- This is marginally positive for the planters in Sabah. Different companies have different ways of recognising the discount in their books.

- We know an industry player that recognises the discount as freight charges inside operating costs.

- We estimate that the RM20/tonne reduction in discount imposed by refiners would improve earnings by 1% to 2%.

- The discount imposed by the refiners in Sabah has always been there for historical reasons.

- In the past, the discount reflected costs incurred for shipping CPO to the refiners in Peninsular Malaysia. There were no refineries in Sabah at that time.

- The discount used to be about RM40/tonne before 2012.

- However since Indonesia implemented the export tax structure in late-2011 to boost its palm refining industry, the refineries in Sabah started increasing the discount to RM100/tonne so they could compete against the Indonesian refineries.

- Going forward as Indonesia’s refining capacity increases and domestic CPO price improves, we believe the discount could decline back to its historical level of RM40/tonne.

- Refining capacity in Indonesia is estimated to climb from 25.1mil tonnes in 2013F to 30.9mil tonnes in 2014F.

- We remain positive on the plantation sector. Currently, we have BUYs on Genting Plantations, TSH Resources, IJM Plantations and Kuala Lumpur Kepong.

Source: AmeSecurities