Plantation Sector - Malaysia to reduce CPO export tax rate? Overweight

- According to news reports, the Plantation Industries and Commodities Minister would be submitting a proposal to reduce the export tax rate of CPO in Malaysia to a range of 8% and 10%. Currently, the export tax rate is 23%. 

- According to the minister, this would place Malaysia in a more competitive position as the export tax rate of CPO is 13.5% in Indonesia presently. 

- Also, he would be asking companies which have not used up their CPO export tax-free quota to surrender the quota to companies which are able to export. Although five million tonnes of CPO for duty-free exports have been approved, only half of the quota has been used. 

- The Minister said that the duty-free export quota may not be needed in the future if the CPO duty were to be lowered. In addition, Malaysia would be talking to Indonesia to come to an agreement on actions in respect of the CPO export tax issue.

- We believe that these measures would assist the upstream players as they would be able to export CPO at a lower tax rate compared to their Indonesian counterparts. 

- Furthermore, companies which have not faced any problems selling their palm products would be able to benefit from the unused export quota. This would allow the company to export CPO tax-free.  

- However, we believe that the proposed measures would be neutral for refiners. Malaysia and Indonesia have export taxes for CPO. In Indonesia, the export tax rate system has been effective in lowering the cost of CPO for the refiners. 

- We reckon that the same thing has not happened for Malaysian refiners partly because of the tax-free CPO export quota system. 

- We believe that stand-alone and smaller refineries have been suffering more than the larger and integrated players. Refining divisions of large plantation companies like Kuala Lumpur Kepong are still profitable. 

- A silver lining for refiners and oleochemical players is the recent plunge in CPO prices. This would allow them to lock-in lower cost of feedstock to produce their refined palm products.  

- We continue to remain positive on the plantation sector. We believe that the selling in CPO prices has been overdone and prices should recover by year-end underpinned by a seasonally lower production. We reckon that the recent fall in share prices of plantation companies has made valuations more attractive and this represents a good opportunity to buy.  

Source: AmeSecurities