Highlights

• Indonesian President Joko Widodo signed a regulation requiring palm oil exporters to pay a levy of US$50/mt for crude palm oil (CPO) and US$30/mt for processed palm oil (PPO) by end-May, in a move to fund the biodiesel subsidies and develop the palm industry in Indonesia. The threshold for export tax is unchanged.

• According to Sofyan Djalil (Coordinating Minister of Economics Affairs), the regulation is expected to generate revenue of at least US$700m each year, of which 40% will be allocated to biodiesel subsidies, and the remaining 60% is allocated to improve state plantations.

• Mildly positive development. Although the imposition of export levy is short term negative to pure upstream players in Indonesia, we are still mildly positive on the sector’s latest development. This is mainly because: (1) The US$20/mt levy differential between CPO and PPO allows players to price their downstream products more competitively vs. their competitors in Malaysia; and (2) Higher biodiesel consumption will lead to higher palm oil consumption and price over the longer term, although the expected levy proceeds of US$280m are only sufficient to fund about 700k mt of biodiesel a year (see Figure 1 for more details).

• Among the plantation stocks under our coverage… br /> Genting Plantations, IJM Plantations, Sime Darby, and TSH Resources will be impacted from the levy imposition, given their exposure to the upstream plantation and absence of downstream operations there (see Figure 2 for more details).

• Maintain Neutral stance on the sector, with average CPO price assumptions of RM2,300/mt and RM2,400/mt for 2015- 2016 for now.

Catalysts

• Implementation of higher biodiesel mandate in Indonesia and Malaysia.

• Weather uncertainties revisit, resulting 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

Top picks

• None.

Source: Hong Leong Investment Bank Research - 8 May 2015