Changes to palm oil tax in Malaysia. Malaysia will scrap the cooking oil stabilisation scheme (COSS) on 1 July 2008, replacing it with a windfall tax on palm oil millers. Under the new windfall tax, a 7.5% tax will be levied in Sabah and Sarawak and 15% tax will be applicable in Peninsular Malaysia for every tonne of CPO which is more than RM2,000 per tonne.
Not surprised by the news. We are not surprised by this news as well as the move to levy higher taxes on Peninsular Malaysia than on East Malaysian palm oil companies. As highlighted in our 22 May note, the government has already warned of changes in these taxes in view of estate owners’ lobby for the removal of the COSS, the government’s need for additional revenue for the development fund and the existing palm oil sales tax for the state governments of Sabah and Sarawak.
Better-than-expected outcome. Our earlier best-case scenario was for status quo on the overall tax burden for planters. Our calculations indicate that the East Malaysian players will end up with tax savings of around 2.5% pts on the selling price for CPO. But planters in Peninsular Malaysia will end up slightly worse off, having to pay an additional 0.5% pts in tax. As the savings for East Malaysian players is higher than the increase in taxes for their peninsular counterparts, we conclude that the outcome is a shade better than our best-case expectation.
Positive on planters. Overall, we consider the new windfall tax to be positive for the Malaysian planters for the following reasons: (1) it removes the overhang on sentiment on the sector stemming from uncertainty over the windfall tax, and (2) the overall earnings impact on the planters that we cover is positive at 0.2-2.2% for FY09. As the impact is marginal, we are not changing our earnings estimates or target prices.
Maintain OVERWEIGHT call. We retain our OVERWEIGHT call on the sector as the windfall tax works out to be a slight net positive instead of our earlier expectation of neutral or slight negative. This is because the windfall tax is lower than the COSS tax that it replaces. IOI Corp remains our top pick among the bigcap planters while Asiatic is still our pick of the mid-cap players. Key re-rating catalysts for the sector are higher CPO price, rising oil prices and potential supply shortfalls in key planting areas due to adverse weather conditions.
Windfall tax replaces COSS
Changes to palm oil tax in Malaysia. Malaysia will scrap the cooking oil stabilisation scheme (COSS) on 1 July 2008, replacing it with a windfall tax on palm oil millers. A 7.5% tax will be levied on estates located in Sabah and Sarawak and 15% tax will be applicable in Peninsular Malaysia for every tonne of CPO which is more than RM2,000. Under the COSS scheme, Malaysian Palm Oil Board (MPOB) collects a special cooking oil cess of 2sen per tonne of fresh fruit bunches for every RM1 per tonne increase in CPO price, as long as price stays above RM1,500 a tonne.
Standardising palm oil taxes across Malaysia. The government revealed that the levy rate for palm oil producers in Sabah and Sarawak is lower because they also need to pay state government tax. The Sabah and Sarawak state governments impose sales tax of 7.5% and 5%, respectively, on the selling price of CPO.
No change in cooking oil price. The government will continue to subsidise the cooking oil price at the current controlled price despite the abolishment of COSS. It will use part of the collection from the new levy to fund cooking oil subsidies.
Figure 1: Differences in the new and old palm oil tax system for Malaysia
Figure 2: Comparing the quantum for new and old palm oil taxes
Comments
Not surprised by the news. We are not surprised by this news as well as the move to levy higher taxes on Peninsular Malaysia than on East Malaysian palm oil companies. As highlighted in our 22 May note, the government has already warned of changes in these taxes in view of estate owners’ lobby for the removal of the COSS, the government’s need for additional revenue for the development fund and the existing palm oil sales tax for the state governments of Sabah and Sarawak. However, there could be some confusion as early reports on the taxes appear to be negative because it was not clear if the COSS was abolished. Closer inspection and confirmation on the removal of cess tax reveals a positive impact as the scrapping of the cess has a much bigger bottomline impact than many appreciate.
Better-than-expected outcome. Our earlier best-case scenario was for status quo(現狀) on the overall tax burden for planters. Our calculations indicate that the East Malaysian players will end up with tax savings of around 2.5% pts on the selling price for CPO or around RM84 per tonne based on our average CPO price assumption of RM3,350 per tonne under the new tax regime. But planters in Peninsular Malaysia will end up slightly worse off, having to pay an additional 0.5% pts in tax or around RM17 per tonne of CPO (see Figure 3). As the savings for East Malaysian players is higher than the increase in taxes for their peninsular counterparts, we conclude that the outcome is a shade better than our best-case expectation.
RM3350
Earnings impact on planters. The new taxes favour plantation companies with high exposure to estates in East Malaysia (Hap Seng Plantations, Asiatic and IOI Corp) as their overall tax burden will be reduced following the revision (see Figure 4). Planters with higher exposure to estates in Peninsular Malaysia will be subjected to higher taxes though in the case of KL Kepong and Sime Darby, this will be fully offset by lower tax burden enjoyed by their East Malaysian estates. The lower taxes will also partially cover the increase in transport costs following the 78 sen and RM1 increase in petrol and diesel prices to RM2.70 and RM2.58 per litre, respectively. We estimate that the new taxes will enhance the earnings of planters under our coverage by 0.2- 2.2% for FY09 and boost our target prices by around the same quantum (see Figure 6).
Figure 4: Breakdown of the location of Malaysian planters estates
Figure 5: Breakdown of CPO production in Malaysia in 2007
Sarawak 10%
Sabah 35%
Pen Malaysia 55%
Figure 6: FY09 earnings impact from the new plantation tax
Valuation and recommendation
Positive on planters. Overall, we consider the new windfall tax which replaces COSS to be positive for the Malaysian planters for the following reasons: (1) it removes the overhang on sentiment on the sector stemming from uncertainty over the windfall tax, and (2) the overall earnings impact on the planters that we cover is positive at 0.2- 2.2% for FY09. As the impact is marginal, we are not changing our earnings estimates or target prices.
Maintain OVERWEIGHT call. We retain our OVERWEIGHT call on the sector as the windfall tax works out to be a slight net positive instead of our earlier expectation of neutral or slight negative. This is because the windfall tax is lower than the COSS tax that it replaces. IOI Corp remains our top pick among the big-cap planters while Asiatic is still our pick of the mid-cap players. Key re-rating catalysts for the sector are higher CPO price, rising oil prices and potential supply shortfalls in key planting areas due to adverse weather conditions.
filed: Better-than-expected outcome from windfall tax.pdf
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