In an effort to further secure domestic supplies of cooking oil, the Indonesian government will remove export volume restriction on its palm oil products and raise palm oil export duty (from maximum of USD375/mt to USD675/mt) and add a new bracket for CPO prices of between USD1,000 and USD1,500 per tonne . While the new tax structure is aimed at securing domestic supplies of cooking oil in Indonesia, this is done at the expense of players with high exposure in Indonesia (such as Genting Plantations and TSH Resources), which realised selling prices will be distorted by the new tax structure. Maintain our 2022-24 CPO price projections of RM4,300/3,300/3,300 per tonne, and OVERWEIGHT stance on the sector. For exposure, we favour players with less upstream exposure in Indonesia, such as FGV (BUY; TP: RM2.43); IOI Corp (BUY; TP: RM5.09), KLK (BUY; TP: RM32.43) and SDPlant (BUY; TP: RM5.95).

NEWSBREAK

Indonesia raises maximum palm oil export levy. In an effort to to further secure domestic supplies of cooking oil, the Indonesian government will remove export volume restriction on its palm oil products and raise palm oil export duty (from maximum of US$375/mt to US$675/mt) and add a new bracket for CPO prices of between USD1,000 and USD1,500 per tonnes. Recall, the Indonesian government had since last week required companies to sell 30% of their planned exports of CPO and olein at home, up from 20% imposed in Jan-20, under the Domestic Market Obligation (DMO) aimed at ensuring local supply amid soaring cooking oil prices in Indonesia.

HLIB’s VIEW

While the new tax structure is aimed at securing domestic supplies of cooking oil in Indonesia, this is done at the expense of players with high exposure in there (such as Genting Plantations and TSH Resources), which realised selling prices will be distorted by the new tax structure.

Forecast. While we believe CPO prices will likely surpass our 2022-24 CPO price projections of RM4,300/3,300/3,300 per tonne, we make no changes on our CPO price projections for now, given the fluid situation. Based on our estimates, every RM100/mt raise in our CPO price projection will lift earnings forecasts for plantation stocks under our coverage by 3.5-15.0%.

Stay OVERWEIGHT. We reiterate our Overweight stance on the sector, underpinned by (i) high near term CPO prices (which will in turn translate to good near term earnings prospects), (ii) easing ESG concerns, and (iii) decent valuations. For exposure, we favour players with less upstream exposure in Indonesia, such as FGV (BUY; TP: RM2.43); IOI Corp (BUY; TP: RM5.09), KLK (BUY; TP: RM32.43) and Sime Darby Plantation (BUY; TP: RM5.95).

Source: Hong Leong Investment Bank Research - 18 Mar 2022