Highlights

• According to Plantation Industries and Commodities Minister Datuk Amar Douglas Uggah Embas, the Government has decided to resume taxing exports of CPO starting from Mar- 15.

• The tax rate will depend on palm oil prices, and the Government will announce details on the tax policy on 16- Feb.

• Recall, the Government initially exempted the export tax on CPO from Oct-14 to Dec-14, and later extended the deadline to end Feb-15, in an attempt to spur demand for palm oil, hence reducing stockpile.

Our View

• We are slightly negative on the latest development, as the reinstatement of CPO export tax may cap palm oil demand, hence prices. This is especially pertinent when demand from key palm oil consuming countries (such as India and China) will unlikely grow much higher, given unattractive CPO price vis-à-vis soybean oil price and potentially further hike in palm oil import duty in India.

• Nevertheless, this will be offset by the hike in biodiesel subsidies in Indonesia (from Rp1,500/litre to Rp4,000/litre), should the biodiesel subsidy hike materialize.

Catalysts

• Implementation of higher biodiesel mandate in Indonesia and Malaysia

• Weather uncertainties revisit, which would result in supply distortion, hence boosting prices of edible oil

Risks

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO
• India imposes higher import duty on CPO
• Escalating production cost (in particularly, labour cost)

Rating

NEUTRAL

Positives

• Long term sector outlook remains favourable

Negatives

• Weak demand and price outlook

Sector call

• Maintain average CPO price projection of RM2,300/tonne for 2015 and RM2,400/tonne for 2016 respectively, as well as our Neutral stance on the sector.

Source: Hong Leong Investment Bank Research - 13 Feb 2015