• Maintain OVERWEIGHT; Top Picks: Johor Plantations, Sarawak Oil Palms, SD Guthrie, Bumitama Agri, and London Sumatra Indonesia. Post-meeting with the Indonesian Palm Oil Association (GAPKI), we believe the Indonesian Government will do what it takes to ensure the B40 mandate is implemented in 2025. However, there could be changes to the policies made along the way to accommodate the mandate.
• CPO output expected to recover by 4% in 2025. GAPKI expects CPO output in 2024 to end 4.2% lower YoY to 52.5m tonnes, with production to recover by 4% in 2025 to 54.5m tonnes. It does not expect to see any more delayed El Nino impact on productivity in 2025 as the weather has normalised.
• Rising cost of production. GAPKI continues to expect CPO costs to rise on an annual basis, given the Government's yearly minimum wage increase which was previously based on inflation rate plus economic growth rate. Although the formula to calculate the minimum wage hike has changed for 2025, minimum wage hike for next year has been set at 6.5% YoY.
• Biodiesel mandate still the main growth driver of consumption in 2024 and 2025, with GAPKI projecting biodiesel consumption of 11.6m tonnes in 2024 (vs total domestic consumption of 24.4m tonnes) and 14.01m tonnes in 2025 (vs total consumption of 27.36m tonnes), based on the B35/B40 mandate for 2024-2025.
• Funding issue for biodiesel remains. Funding for the B40 mandate will still be an issue, especially if there is less CPO available for export, translating to less levy collected for the biodiesel fund. GAPKI sees several options:
• No change to OVERWEIGHT call. We believe the Indonesian Government is unlikely to back down on the B40 mandate, although we do highlight that at the current palm oil and gasoil (POGO) spread, the biodiesel fund is likely to be depleted before the year end (refer to our sensitivity table in Figure 1). As such, we should be prepared for changes like the options highlighted above to come through in the near future - which could be detrimental to Indonesian planters' earnings but offset by sustained higher CPO prices.

Source: RHB Securities Research - 19 Dec 2024