A Fruitful Season
Lowered Levy Promotes Higher Margin
· CPO price has gradually kick back to the MYR4,000 levels per metric ton, precisely at MYR4,121/mt which grew by +54.87% YoY/+14.47% YTD. We see that the price previously struggled to rise and keep declining, but several catalysts have brought the price back up.
·The Government has agreed to narrow the CPO price range that is subjected to levy from USD750/mt to USD1,000/mt. With every increase of USD50 on price, the levy increased by USD20, capped at USD175 from previously at USD255.
· With these new levy, CPO producers can benefit from higher margin as tax and levy portion towards price decreases. As seen on exhibit 02, the higher the reference price, the tax and levy margin will follow. But with the new terms in July-2021, we can see that tax and levy to price ratio fell to ~26% from ~36% previously, which delivers a higher price margin (see exhibit 02).
Increasing Global Demand align with Economic Recovery
· India has decided to lower their CPO import levy to 10% from previously 15% in the 3Q21 period (July-September). We see that this is done to increase India’s CPO inventory as tax and levy to price ratio narrowed to 30% from 35% prior to the policy. Furthermore, the Government also grant permission for RBD Palm Olein import which was banned 18 months ago. This is due to higher domestic plant-derived oil prices. India is one of the largest importers with 8.7 million ton in FY20 as well as the largest CPO consumer after Indonesia. We see that as India recovers from the pandemic, CPO demand will naturally rise, resulting in higher import for consumption.
· The policy also has impacted Malaysia and Indonesia. Whereas India’s import from Malaysia surge and drove the price higher. Same happened with China’s import from Indonesia.
· Refinitiv revises their production estimate for Indonesia to 47.3 million ton, which rose by +1% from previous estimate. While Malaysia’s production is revised lower to 17.99 million ton (-2.2% from prior estimate) due to labor and fertilizer shortage, weather and the ongoing pandemic. The Malaysian Palm Oil Council stated that CPO price will be at the range of MYR3,500 to MYR3,800 per metric ton as the export increase seems only temporary within the 3Q21 period in line with India’s policy. Subsequently, MNCS estimate that the average price for FY21E will remain at ~MYR3,500/mt.
OVERWEIGHT Outlook with top Picks: AALI IJ and DSNG IJ
Our outlook remains OVERWEIGHT for the plantation sector as we still believe that CPO price could still increase along with growing demands on recovering countries. Our BUY recommendations are for AALI (TP: IDR14,350) and newly covered DSNG (TP: IDR960) as we believe both companies can be a part of the sustainable palm oil supply chain. Moreover, AALI is also the most benefitted company from the new levy policy. Lastly, the risk to our call is lower production due to the weather and the pandemic. AALI and DSNG are traded at -1.5STD on 0.82x/0.92x PBV levels, respectively.
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