Rooting out the windfall tax impact

20 June 2008
CIMB Research Report

Windfall tax on palm kernel oil too
To get to the root of the windfall tax on oil palm planters announced on 4 June 08, we got hold of the Windfall Profit Levy Act. Below are our findings and assessment: Windfall tax replaces cooking oil subsidy from 1 July 2008. The report clarifies that the current cooking oil subsidy scheme (COSS) will be scrapped on 30 June 2008. This means that the payment of cess under COSS will apply to production up to June. The COSS will be replaced by the new windfall tax, which will take effect on 1 July 2008.

Comparing the tax schemes. Under the COSS, the Malaysian Palm Oil Board (MPOB) collects a special cooking oil cess of 2 sen per tonne of fresh fruit bunches for every RM1 per tonne increase in crude palm oil (CPO) price above RM1,500 a tonne. The windfall tax which replaces it will be imposed on the palm oil millers as follows:
(1) 7.5% for every tonne of CPO and palm kernel oil (PKO) exceeding RM2,000 per tonne for palm oil estates located in Sabah and Sarawak
(2) 15% for every tonne of CPO and PKO exceeding RM2,000 per tonne for palm oil
estates located in Peninsular Malaysia.

PKO also subject to windfall tax. We gathered from the official document that the windfall tax will also apply to PKO. This is contrary to earlier news reports that only CPO will be subject to the windfall tax.

Other technical issues.
The tax will be levied on average monthly CPO price published by MPOB and not the CPO price achieved by the respective planters. The new windfall tax applies to all palm oil planters, unlike the COSS, which exempted smallholders.


Comments

Earnings enhancement cut by 0.5% pts. In our earlier calculations, we assumed that the windfall tax will only be applicable to CPO. With PKO also subject to the windfall tax, we now estimate 2% pts savings for East Malaysian players instead of 2.5% pts, based on our CPO price assumption of RM3,350. The additional tax burden on Peninsular Malaysia estates will be 1.5% pts on the selling price instead of 0.5% pts as previously estimated.

This does not alter our earlier conclusion that the new windfall tax favours Malaysian planters with high exposure to East Malaysian estates and is negative for planters with large estates in Peninsular Malaysia. We recalculated the potential earnings impact and found that the impact of the new taxes on the earnings of the planters under our coverage ranges from -0.3% to +1.8% against our earlier expectation of 0.2-2.2% earnings enhancement.

Impact on government – higher collection. We estimate that the government will collect higher taxes under the windfall tax scheme as opposed to the COSS as the new scheme applies to all oil palm planters unlike the COSS which exempted planters with less than 40ha of estates. Secondly, the windfall tax covers PKO products, which currently fetch higher selling prices than CPO. Based on various assumptions laid out in Figure 6, we estimate the government’s collection under the windfall tax scheme to be 13% higher than the COSS scheme. Out of the RM2.9bn estimated tax collection under the windfall tax scheme, we estimate that only RM1.4bn will go towards subsidising the cooking oil in Malaysia based on a monthly usage of 70,000 tonnes. The remaining RM1.6bn could be used to fund other food subsidies and other government expenditure.

Valuation and recommendation

Planters’ share price corrected due to confusion over new windfall tax. The share prices of plantation stocks have more than recovered from the dip caused by initial confusion over the new windfall tax formula. Maintain OVERWEIGHT stance. We are not changing our earnings estimates or target prices for the planters in our universe as the impact is minimal. Also intact is our OVERWEIGHT call on the sector in view of the positive outlook for CPO price, driven by tight supply, high oil price and weather worries at key planting areas. The recent clarification on windfall tax, although slightly less positive than our initial estimates, has lifted uncertainty over the potential earnings impact from the higher tax. On top of that, there is potential upside to our CPO price and earnings forecasts should the current wet weather in the US midwest continue and affect new plantings as well as the development of corn and soybean plantings in the US. There is no change to our top picks in the sector – IOI Corp in the big-cap segment and Asiatic in the mid-cap category.

filed: Rooting out the windfall tax impact.pdf