Bimb Research Highlights

Plantation - Indonesia’s Export Ban Details

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Publish date: Thu, 28 Apr 2022, 06:17 PM
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Bimb Research Highlights

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Indonesia has widened the scope of its planned export ban on cooking oil’s raw materials to include crude palm oil, refined palm oil and used cooking oil, among other palm oil products that will come into force at midnight Wednesday, 27 April 2022. According to President Joko Widodo, the ban will be in place until domestic needs have been met as the country needs taxes, foreign exchange and trade balance surplus. We take the view that the export ban is for the short-term and will last not more than a month i.e., after the Muslim festivities, Aidul Fitri.

Our View

Indonesia’s plan to ban the exports of palm oil will tighten the availability of palm oil in the export market and will worsen the global edible oils imbalances. This will intensify the dilemma facing food security issues since it will add to food inflation and hurt consumer and business confidence when affordability becomes a concern, especially in price-sensitive importing countries like India, Bangladesh, and Pakistan, to name few.

We believe this would have an effect on the volatility of edible oil prices (CPO and other vegetable oil) and heighten prices in 2Q22 to ration demand. We are of the view that this could keep the CPO prices higher and therefore, above RM6,000/MT until the Aidul Fitri festival in the short term before normalizing to RM4,000/MT-RM5,000/MT in the 2H22 when the Indonesian government reverts back their plan on exports ban, which is coinciding with higher palm oil production month. As the Indonesian move is aimed at securing domestic supplies of cooking oil in Indonesia, this is done at the expense of Malaysian players with high exposure in Indonesia like TSH, Genting Plantations, KLK, and Sime Darby Plantations, which realized selling prices will be distorted by the price controls.

Malaysian planters are the clear winner of this latest development. Indonesia’s upstream players are unable to fully benefit from the elevated CPO prices because the selling price in the domestic market will be determined by the Indonesian government. We understand that the ban would remain in place until the prices of bulk cooking oil drop to 14,000 rupiahs ($0.9720) per liter. As for integrated players such as KLK, and Sime Plant which have refineries in Indonesia, there would be 2 effects. They will benefit in terms of cost (low feedstocks price) of which the margin would improve. But on the flip side, sales will drop because of the export ban.

Maintain Overweight on the sector with an average CPO forecast for 2022 of RM5,000/MT - as we expect plantation companies’ earnings risk to remain firmly on the upside as CPO price is anticipated to trade above RM5,000/MT (much higher than the average yearly historical prices) which will drive revenue and earnings growth momentum for the rest of 1H22. We continue to prefer pure plantation companies that can leverage on higher CPO price as well as those diversified companies with downstream capacities and export capabilities in Indonesia who can benefit from Indonesia’s regulatory structure. We have BUY call on HAPL (RM2.64), SOP (RM6.00), IOI (RM5.00), KLK (RM28.40), SIME Darby Plants (TP: RM5.50), GENP (TP: RM9.57) and Sarawak Plant (RM3.64) though HOLD recommendation on FGV (TP: RM1.82) and TSH (TP: RM1.49); and non-rated for TH Plant.

Source: BIMB Securities Research - 28 Apr 2022

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