We recently went to West Kalimantan, Indonesia, to visit GENP’s PT SISM oil-palm estate. Together with Daiwa alliance partner Bahana Securities, we also visited local agencies (BPDPKS and APROBI) for an update on Indonesia’s biodiesel program, and local plantation companies (TBLA and Bumitama). Our key goal was to assess the prospects of Indonesia’s plantation industry as it supplied 57% of global palm oil in 2018. In our view, the Indonesia government’s biodiesel initiative helps to create sustainable demand for palm oil and successfully absorb domestically-produced palm oil for biofuel. As in Malaysia, we expect Indonesia’s palm-oil inventory levels to fall gradually with higher exports and consumption of palm-oil products. This could help improve CPO prices to RM2,400/MT for 2019E (from RM2,232/MT in 2018), benefiting Malaysia and Indonesia planters. Overall, we remain NEUTRAL on Malaysia’s plantation sector.

A Visit to GENP’s Indonesian Oil-palm Estate

PT SISM Mulia is Genting Plantation’s (GENP MK, RM10.50, HOLD) earliest oil-palm estate in Indonesia, with a total landbank of 14.4k ha. The FFB yield at GENP’s Indonesia estate was 15 MT/ha in 2018, lower than the 21.8 MT/ha from its Malaysia estates. This is partly due to the younger palm trees in Indonesia (Indonesia: 7.5 years, vs. Malaysia’s 16 years). CPO produced from the PT SISM Mulia estate is both ISPO and RSPO certified, which enables the group to get slightly better prices from buyers.

Biodiesel Program Set to Help Absorb Inventory

Both BPDPKS and APROBI focus on ways to improve the Indonesian palm-oil sector, especially on the biodiesel program. The B20 biodiesel mandate in Indonesia has led to an increase in production by 46% yoy to 3.8m KL in 2018. For 2019, the agencies expect Indonesia to produce c.6.2m KL of biodiesel. The Indonesia government plans to speed up implementation of the B30 biodiesel program to late-2019 or early-2020, implying opportunities to absorb the domestically-produced palm oil.

Weak CPO Prices Affected Plantation Companies in 2018

Similar to the Malaysia plantation companies, earnings at the Indonesia planters like TBLA (not rated) and Bumitama (not rated) were also affected by weak CPO prices in 2018. However, this was partially offset by higher sales volumes of palm-oil products. We note TBLA has a sugar division, which could take advantage of the structural deficit in Indonesia’s sugar industry. The sugar deficit has widened over the years as domestic demand outstripped production with slower sugarcane planting growth, putting importers and planters like TBLA in a sweet spot.

Source: Affin Hwang Research - 29 Mar 2019