Plantation Sector Update - 26 March 2021

PLANTATION SECTOR UPDATE

In the Pouring Rain

The Price Picks Up Again

•  CPO price starts surfacing again, standing at the level of RM3,863/mt (7.31% YTD/62.11% YoY) after hitting the highest price at RM4,138/mt on March 15, 2021. At the same time, soybean price still exceed the growth by 30.90% YTD/ 113.61% YoY to USD54.77/lbs.
•  CPO price is estimated to continue an uptrend with the upcoming Ramadhan season and Indian Spring Festival known as Holi which will push demand further.
•  Subsequently, the Government plans to increase the CPO reference price to USD1,093.83/mt for Apr-2021 from USD1,036.22 in Mar-2021.
•  In line with the rise of the price, the export tax followed the increase from USD93/mt to USD116/mt (see exhibit 02) based on Financial Minister Regulation No.13/PMK.010/2017. While the additional levy remains at USD255/mt which is the cap price.
•  The increase on tax will surely burdened CPO companies, but we believe the rise on ASP would be able to offset that while maintaining net profit margin.

Tight Inventory, Low Production

•  Malaysia has published their CPO position as of Feb-2021 which is lower compared to Jan-2021 (see exhibit 03). Production is reportedly fell by -1.85% MoM to 1.11 million tons in Feb-2021 followed by the drop on inventory to 1.3 million tons (-1.85 MoM) and export to 895,556 tons (-5.49% MoM).
•  Meanwhile, GAPKI estimate that the Indonesian CPO inventory would drop -45.17% YoY to 2.67 million tons at the end of FY21E (vs 4.87 million tons at FY20).
•  On the other hand, production is expected to grow by 4% YoY to 49 million tons as well as demand to 56 million tons (+9% YoY) in FY21E supported by better maintenance on plantations.
•  Hence, with the B30 program, the Government expect that 8 million tons or 16.33% of the targeted CPO production can be absorbed for 9.2 million kiloliters biodiesel in FY21E which aims to balance out the price.

Further Steps to Support Indonesian CPO

•  As previously reported, Switzerland has agreed to support Indonesia-EFTA Comprehensive Economic Partnership Agreement (IE-CEPA) which hopefully will increase market access towards Indonesian CPO and derivatives. As Indonesian Palm Oil Sustainability (ISPO) certification has also been applied to ensure sustainability and competitiveness in the export market.
•  In response to the anti-CPO campaign regarding to human right violation issues on plantations, GAPKI has recently launched a simple guidelines for the protection for women workers which is expected to improve labor governance and deflect further negative issues globally.
•  Moreover, GAPKI also has planned to accelerate the folk’s oil palm rejuvenation. We see that this will serve it’s purpose in increasing CPO production which is inline with GAPKI’s FY21E estimate.

OVERWEIGHT Outlook with top Picks: AALI and LSIP

We maintain our OVERWEIGHT recommendations for the plantation sector as we still believe that CPO price could still increase amid the rollout of vaccine which gave a better outlook on economic recovery. The risks to our call is the demand shift towards cheaper alternative oils. We still maintain our BUY recommendations for AALI (TP: IDR14,350) and LSIP (TP: IDR1,920). Currently,LSIP is trading close to -0.5STD with 0.97x PBV, while AALI is trading close to -1STD with 1.09x PBV.

Disclaimer On

LSIP, AALI