PLANTATION SECTOR UPDATE
Golden Momentum?
Industry Has Started to Show Recovery ?
Indonesian CPO production recorded an increase of 12.91% YoY to 47.43 million tons in FY18 (vs. 42.01 million tons in FY17) with domestic consumption at 13.49 million tons. Indonesia's CPO exports during FY18 also recorded an increase of 7.85% YoY to 34.70 million tons. However, CPO prices are still decreasing until April 2019 by 6.19% YoY.
Potential Declining Indian Import Tax and Zero Export Tariff and B20 Implementation Becomes a Positive Catalyst
The India government reduced import duties for the shipment of CPO and its derivatives from countries in Southeast Asia, including Indonesia. Tariff reduction from in 54% slipping to 50%, will drive Indonesian PO RBD exports up to 96.5 thousand tons. Ministry of Finance applies the implementation of new levies based on the boundaries of the CPO price value, where the export levies of CPO products and derivatives will be zeroed (0%). This is a positive thing to expand Indonesia's CPO export market. In addition, the government seeks to increase domestic CPO consumption through expansion of B20, We believe the B20 mandatory expansion program is effective, thus increasing domestic CPO consumption.
Risks from the Implementation of the Renewable Energy Directive (RED) II
The European Union (EU) stipulates that CPO is a category of high risk food crops, so the EU will limit the use of palm oil and remove CPO gradually from the EU biofuels market. We judge that with the enactment of RED II, it will have a negative impact on the decline in the CPO export market for Indonesia.
NEUTRAL Recommendation with Top Picks: LSIP and AALI
We still maintain the NEUTRAL outlook for the plantation sector in FY19F. We predict the plantation sector has the potential to move stagnant until the end of 2019. We believe that positive issues both in terms of increasing domestic demand and decreasing inventories due to weather factors will be an interesting turnaround story going forward. However, we see several factors that are negative catalysts for declining CPO inventories and CPO prices such as: 1) Changes in regulation of importing countries that have the potential to decrease demand; 2) Increased CPO production. We recommend LSIP (BUY, TP: Rp1,420) because of a healthy balance sheet condition, and AALI (BUY, TP: Rp13,825) because of the chance of increasing CPO demand from the implementation of B20.
