25 June 2007 - Cess to be pruned?

Ministry to meet planters on cess
Heard in the market.
We understand that plantation companies will be meeting government officials this week to discuss and get clarification on the cooking oil price stabilisation scheme. This could be mildly positive for the planters if the government agrees to modify the structure of the cess, possibly by raising the RM1,500 CPO price threshold at which the cess is levied.

A recap. In early May 07, Minister of Plantation Industries and Commodities Datuk Peter Chin revealed his decision to impose cess on planters effective 1 June 2007.Plantation companies were officially informed on this new form of tax two weeks ago through an official circular from the industry association, MPOB. Proceeds from the cess will be used to compensate refiners and keep domestic cooking oil prices at the current controlled price. According to press reports, the scheme will only last 12months.

What is the cess rate?
The cess is levied only when monthly average CPO price isRM1,500 per tonne and higher. A cess rate of RM2 per tonne of FFB is applicable for every RM100 per tonne increment in MPOB’s average CPO price above RM1,500 per tonne. For instance, if CPO price averages RM2,400-2,500 per tonne, MPOB will collect cess of RM20 for every tonne of FFB output. Based on the country’s oil extraction rate of around 20%, this implies a tax of RM100 for every tonne of CPO output. This works out to be 4% of the CPO price.Govt scheme and small holders exempted. Planters which own less than 40ha,any government land schemes with settlers or individual participants and any oil palm small holdings owned by individuals but managed and controlled by government agencies will be exempted from this tax.

Avg monthly CPO price (RM/tonne)* - Cess rate (RM/tonne)**
< or ="1500">1500-1600 2
>1600-1700 4
>1700-1800 6
>1800-1900 8
>1900-2000 10
>2000-2100 12
>2100-2200 14
>2200-2300 16
>2300-2400 18
>2400-2500 20
>2500-2600 22
>2600-2700 24
>2700-2800 26
>2800-2900 28
>2900-3000 30
>3000-3100 32
>3100-3200 34
>3200-3300 36
>3300-3400 38
>3400-3500 40
* Based on MPOB's average CPO price
** To be levied on FFB production


Comments
Key differences with past cooking oil schemes.
The cooking oil price stabilisation scheme is not new, having been enforced in 1999 and 2004 when CPO price soared above RM1,500 per tonne. However, we observe two key differences between past schemes and the current one. First, the current tax rate is double that in the previous scheme as cess is now levied on FFB as opposed to CPO output. Second,small holders and government schemes are spared from the cess this time around.

What next?
When the cess rate was revealed through the press about a month ago,it took many planters by surprise as the rate was higher than expected. We believe that in the upcoming meeting with the ministry, the planters will seek clarification on the scheme and may lobby for a slight change in the tax rate.

Potential point of contention.
The earnings of planters who have sold a large chunk of their 2007 production forward will be more sensitive to the cess in a rising CPO price environment. This is because the cess rate is based on MPOB’s average CPO price rather than the average CPO price achieved by the plantation companies.

Impact on planters.
We have only accounted for half of the potential cess costs in our earnings forecasts for the plantation companies we cover. This is because we had factored the 2004 cess rate into our forecasts prior to the announcement of the new cess rate. Should the cess rate stay at the approved rate after the upcoming meeting,we would have to trim 1-2% off our EPS forecasts.


Valuation and recommendation
Maintain OVERWEIGHT call on sector.
Overall, we believe market expectations already factor in the new cess rate and any reduction in the cess rate would be viewed positively by the market. We maintain our OVERWEIGHT call on the sector and view the recent decline in CPO price from its recent peak of RM2,886 per tonne as a healthy correction. Fundamentals for CPO price remain bright due to demand-supply imbalances. Key catalysts for the sector are the CPO price rise and M&A activities. Our key picks remain KL Kepong and Asiatic.


filed:cess to be pruned.pdf