Stock Name: KLK
Company Name: KUALA LUMPUR KEPONG BHD
Research House: CIMB
Plantations sector
Retain trading buy; Sime Darby remains top pick with fair value of RM10.70: The government has confirmed that it will roll out in stages the mandatory sale of biofuel in Malaysia from June next year. This is an official confirmation that the government has pushed back its timeline for nationwide implementation of B5.
This is a 16-month delay from the earlier target of February 2010 but is not a major surprise to the market. On a more positive note, the government has retained the target blend of 5%, contrary to earlier speculation that it may be scaled back to 3%.
We believe the delay was caused by the main issues of who will bear the cost of the implementation of biodiesel and the logistics of getting the biodiesel blend to the market, for instance, who will purchase the palm-based biodiesel for blending with the diesel and bear the additional costs? Secondly, who will subsidise the biodiesel which is more expensive than the subsidised diesel and whether the government will extend the same subsidy to biodiesel? Earlier estimates suggest that the cost of subsidising biodiesel in the country could touch RM250 million.
From the minister's statements, it appears that these two issues have been solved. The government will finance the construction of biodiesel blending facilities at six petroleum depots in the central region and has pushed back the implementation to give the petroleum companies sufficient time to prepare themselves for the sale of the new blended diesel.
As for the pump price of biofuel, the minister has indicated that it might fluctuate according to the prevailing price of petroleum and crude palm oil.
This suggests that by the time the biodiesel mandate is implemented, the government may have rolled back the subsidy on diesel and consumers will have to pay the market price of biofuel and diesel.
We expect this news to have minimal impact on crude palm oil (CPO) price in the near term given that the government had hinted earlier at the possibility of a delay. However, this news is positive in the medium term as full implementation will lead to additional domestic demand of 500,000 tonnes for palm-based biodiesel, which is equivalent to 3% of the current CPO production in Malaysia.
We retain our CPO price forecasts, which means status quo for the earnings estimates and target prices for all the Malaysian planters we track. We continue to rate the plantation sector a trading buy due to our positive take on CPO price and Malaysian planters' underperformance relative to regional peers since last year.
We continue to prefer the planters with higher exposure to Sabah estates as these players should register higher production growth in 2010 due to the recovery of yields from the poor weather in 2009. Also, planters in East Malaysia are subject to a higher CPO price threshold of RM3,000 per tonne for windfall tax compared to RM2,500 for Peninsular Malaysia planters and a lower windfall tax rate of 7.5% versus 15% for Peninsular Malaysia players.
In line with this strategy and given their attractive valuations, we like Genting Plantations and Hap Seng Plantations. Our top pick continues to be Sime Darby for its improved transparency and potential yield enhancement for its estates. - CIMB Research, March 25
This article appeared in The Edge Financial Daily, March 26, 2010.
Company Name: KUALA LUMPUR KEPONG BHD
Research House: CIMB
Plantations sector
Retain trading buy; Sime Darby remains top pick with fair value of RM10.70: The government has confirmed that it will roll out in stages the mandatory sale of biofuel in Malaysia from June next year. This is an official confirmation that the government has pushed back its timeline for nationwide implementation of B5.
This is a 16-month delay from the earlier target of February 2010 but is not a major surprise to the market. On a more positive note, the government has retained the target blend of 5%, contrary to earlier speculation that it may be scaled back to 3%.
We believe the delay was caused by the main issues of who will bear the cost of the implementation of biodiesel and the logistics of getting the biodiesel blend to the market, for instance, who will purchase the palm-based biodiesel for blending with the diesel and bear the additional costs? Secondly, who will subsidise the biodiesel which is more expensive than the subsidised diesel and whether the government will extend the same subsidy to biodiesel? Earlier estimates suggest that the cost of subsidising biodiesel in the country could touch RM250 million.
From the minister's statements, it appears that these two issues have been solved. The government will finance the construction of biodiesel blending facilities at six petroleum depots in the central region and has pushed back the implementation to give the petroleum companies sufficient time to prepare themselves for the sale of the new blended diesel.
As for the pump price of biofuel, the minister has indicated that it might fluctuate according to the prevailing price of petroleum and crude palm oil.
This suggests that by the time the biodiesel mandate is implemented, the government may have rolled back the subsidy on diesel and consumers will have to pay the market price of biofuel and diesel.
We expect this news to have minimal impact on crude palm oil (CPO) price in the near term given that the government had hinted earlier at the possibility of a delay. However, this news is positive in the medium term as full implementation will lead to additional domestic demand of 500,000 tonnes for palm-based biodiesel, which is equivalent to 3% of the current CPO production in Malaysia.
We retain our CPO price forecasts, which means status quo for the earnings estimates and target prices for all the Malaysian planters we track. We continue to rate the plantation sector a trading buy due to our positive take on CPO price and Malaysian planters' underperformance relative to regional peers since last year.
We continue to prefer the planters with higher exposure to Sabah estates as these players should register higher production growth in 2010 due to the recovery of yields from the poor weather in 2009. Also, planters in East Malaysia are subject to a higher CPO price threshold of RM3,000 per tonne for windfall tax compared to RM2,500 for Peninsular Malaysia planters and a lower windfall tax rate of 7.5% versus 15% for Peninsular Malaysia players.
In line with this strategy and given their attractive valuations, we like Genting Plantations and Hap Seng Plantations. Our top pick continues to be Sime Darby for its improved transparency and potential yield enhancement for its estates. - CIMB Research, March 25
This article appeared in The Edge Financial Daily, March 26, 2010.
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