Plantation Sector Update 28 January 2021

PLANTATION SECTOR UPDATE

Surfing the Storm

Bad Weather, Good Price

• CPO might seem to be declining earlier this year reaching RM3,388/metric ton (-5.89% YTD), but the weather shows otherwise as data from Colombia University stated that there is a 65% chance that La Nina might last until May 2021.
•  CPO price has rallied by 24.83% from October to now, followed by a higher incline on soybean oil (+33.73%). The high rise in Soybean would encourage a shift towards CPO.
•  Furthermore, Malaysia's CPO inventory has recorded a deep decline (-37.09% YoY) in FY20, while export surged by 16.21% YoY.
•  Subsequently, Indonesia recorded a growing export to India and China as CPO export from Indonesia accounted for 81.23% of China's export and 78.44% of India's export in FY20. Thus, CPO price will continue to escalate as demand rose on a shortage.
•  We estimate that the CPO price will reach RM3,900 to RM 4,000 per metric ton in FY21E, along with the prolonged heavy rain.      

Global Turmoil: Boosting up or Dragging down?

• The Blue Sweep brought on a brighter prospect on clean energy within Joe Biden's Presidency. We hope the use of biodiesel will soar and a considerable stimulus will make way to the emerging market.
•  On the flip side, the European Union (EU) considers the possibility of restricting palm oil usage due to some violations in Malaysia and Indonesia. Since the EU is the third largest CPO importers, Malaysia and Indonesia will be joining forces to counter negative consumer and tighter regulations in the EU and the western countries.
•  We believe a shift from CPO could be slowed down, as CPO still proved to be less costly than other substitute oil. 

B30 to be Continued in FY21E

• Biodiesel absorption has reached 8.4 million kiloliters (+31.87% YoY), which equals 87.96% from the FY20 target. Aside from lowering emission and reducing imports, biodiesel has contributed to foreign exchange savings of IDR38.31 trillion in FY20.
•  Moreover, the Government will delay the increase in B30 to B40 in FY21E due to a higher CPO price. The biodiesel absorption target in FY21E is at 9.2 million kiloliters.
•  The Government also has budgeted an incentive for solar and biodiesel price spread which amounting to ~IDR46 trillion in FY21E. The incentive is higher, in line with the increase in absorption target, and the fund will be derived from the progressive export tax passed on to the CPO companies.
•  Meanwhile, the CPO progressive tax has been applied in Jan-21, with every increase of USD25, a USD12.5 tax will be charged. Though it seemed to be an extra burden for the CPO companies, we believe the CPO price increase will benefit them. The Government also estimate the CPO export value to reach USD20 billion in FY21E.

OVERWEIGHT Recommendation with top Picks: AALI and LSIP

We maintain our OVERWEIGHT outlook for the plantation sector as the La Nina phenomenon extended. Subsequently, we decide to revise our Target Price for LSIP from IDR1,250 to IDR1,920 and AALI from IDR11,800 to IDR14,350 with BUY recommendation as both stocks have hit our previous target price and LSIP being most sensitive to commodity price movement. LSIP is currently trading at -0.3STD with 1.06x PBV, while AALI is trading at -0.7STD with 1.17x PBV.

Disclaimer On

AALI, LSIP