Indonesia raises CPO export tax rate

26 June 2008
am research

Bloomberg reported that Indonesia has raised the CPO export tax rate and the base price used to calculate the levy. The base price will be raised to US$1,144/ tonne (RM3,660/tonne) in July from US$1,105/tonne (RM3,536/tonne) in June, Diah Maulida, director general of foreign trade said. The tax rate on CPO shipments will be raised to 20% from 15%.

Plantation companies with exposure to Indonesia are KL Kepong (“KLK”), Wilmar International and Indofood Agri-Resources. About one-third of KLK's CPO output are from Indonesia while Wilmar exports 80%-90% of its CPO production to countries like China. Indofood Agri-Resources is not affected as 80% to 90% of its CPO production are used internally to manufacture cooking oil.

At the base price of US$1,144/tonne, we estimate that the higher export tax rate of 20% would reduce KLK’s FY09F net profit by 2% to 3%. Similarly for Wilmar. We estimate that the higher export tax rate would result in Wilmar’s FY09F net profit being lowered by 3% to 4%.

We think that Indonesia is increasing the CPO export tax rate to discourage exports and ensure that there would be sufficient palm oil for the domestic cooking oil manufacturers.

With the higher export tax rate of 20% in Indonesia, it appears that plantation companies with operations in Malaysia pay less taxes compared to Indonesia as the windfall tax on CPO output from Peninsular Malaysia and East Malaysia are only 15% and 7.5% respectively. In East Malaysia, there is also additional sales tax of 7.5%.

We maintain Overweight on the plantation sector as weather disruptions and high crude oil prices would continue to support CPO prices. We recommend to Buy IOI Corporation and KLK for their efficient operations and Wilmar and Indofood for their growing upstream plantation profits. We also like smaller companies like Sarawak Oil Palms and TH Plantations.