Plantation - Feeling the pain without the tax free quota

The Malaysia Ministry of Plantation Industries and  Commodities (MPIC) has decided to cut the CPO export tax and scrap the CPO tax free quota from 1-Jan-2013 onwards. The new CPO export tax will be between 4.5%-8.5%, to be determined on a monthly basis. In order to increase biodiesel usage by 0.3m mt, the B10 Program has been suggested for the unsubsidised sector. We believe that the news is overall negative to the Malaysian upstream players due to the expected lower net Average Selling Prices (ASP) realised for CPO. However, this will benefit Malaysian downstream players due to better margin from the lower CPO feedstock cost. The B10 Program is commendable and should provide a lift to international CPO prices by ~RM150/mt if the program is implemented successfully and reduces the inventory level by 0.3m mt. The overall impact is positive to big cap planters with significant downstream exposure in Malaysia such as IOICORP, SIME, KLK and FGVH. However, pure upstream players who are likely to suffer lower earnings are GENP, IJMP, TSH, UMCCA and TAANN. We are maintaining our CPO price estimates of RM2,975-RM3,000 per mt for CY12-CY13. However, our existing calls and Target Prices (see  page 2) for planters are currently UNDER REVIEW with a high chance of Target Prices being cut for the pure upstream players but minimal changes for the big cap planters. 

Malaysia to cut CPO export tax and scrap duty free  export quota.  The Malaysia Ministry of Plantation Industries and Commodities (MPIC) has decided to cut the CPO export tax and scrap the CPO tax free quota from 1-Jan-2013 onwards. According to the media, the new CPO export tax will be between 4.5%-8.5% and will be determined on a monthly basis. In addition, MPIC is consulting relevant parties to implement the B10 Program for the unsubsidised sector which should result in an additional CPO demand of 300,000 mt annually. Currently, B5 Program in the Central Region consumes 112,000 tonnes of CPO annually.

Negative to Malaysian upstream players due to the expected lower realised net ASP for CPO. Assuming current international CPO spot prices at RM2,300/mt, an upstream player will have to pay 4.5% CPO export tax or ~RM100/mt if it chooses to export CPO. Hence, the realised ASP will be ~RM2200/mt for exported CPO. If a downstream operator in Malaysia is willing to buy the CPO at RM2210/mt, the same upstream player is hence better off selling off its CPO locally in Malaysia. In the longer run, this will cause local spot CPO prices to trade at a discount rate close to the CPO export tax rate. On  the overall, we think upstream player earnings will decline due to lower revenue earned.

Downstream players to benefit from lower CPO feedstock cost in the range of 4.5%-8.5%.  This is consistent with the magnitude of the CPO export tax. Hence, downstream players in Malaysia should be able to compete better against Indonesia, although we believe the feedstock cost discount range for the latter is still higher at 7.5%-12.5%. 

B10 Program to support international CPO prices if successfully implemented on time.  Assuming that the additional CPO demand of 0.3m mt  materialises post the B10 implementation, this should result in a lower inventory level of the same 0.3m mt. Our multiple correlation model suggests that for every 0.1m mt reduction in the inventory level, the average international CPO price in 2013 should increase by 1.6% or RM48/mt from our current base case estimate of RM3000/mt.

Overall impact is positive to big cap planters but negative to pure upstream companies.  We believe that the key beneficiaries (ranked by order) are IOICORP (MP; TP: 5.15), SIME (MP; TP: RM9.80), KLK (MP; TP: RM22.30) and FGVH (Not Rated). Due to their larger downstream capacity in Malaysia as compared  to their CPO production capacity, the higher margin from the downstream segment should hence be more than enough to cover the lower income from their upstream segment. Pure upstream players such as GENP (MP; TP: RM9.25), IJMP (MP; TP: RM3.38), UMCCA (OP; RM7.70), TSH (OP; TP: RM2.80) and TAANN (UP; TP: RM3.60) are likely to register lower earnings due to the lower net ASP. Our Target Prices for all planters under our coverage are UNDER REVIEW at this juncture pending meeting meetings with the management of plantation companies to better estimate the impact of this structural change to the sector.

Source: Kenanga