RHB Group Research analyst Hoe Lee Leng is keeping “neutral” on the plantation sector, with top picks including Wilmar International.
In her April 25 note, Hoe says that Indonesia’s ban on its palm oil exports, which will start on April 28, may not necessarily have the effects it desires.
The move follows a shortage of cooking oils in the domestic market — Indonesia president Joko Widodo wanted to ensure the availability of food products at home, after global inflation levels soared to a record high. The policy implementation will be monitored and evaluated to assure that the availability of cooking oil in the domestic market becomes abundant and affordable.
In Indonesia, the retail price of branded cooking oil averages at INR26,436 per litre, up more than 40% in 2022 so far, Hoe highlights. “In some provinces, prices have nearly doubled in the past month alone, according to a price monitoring page. As a result, demonstrations have taken place in several cities across Indonesia in recent days over high cooking oil prices,” she adds.
Although Indonesia has set a cap of INR14,000 per litre for bulk cooking oil since January, the Trade Ministry data showed that it was sold at more than INR18,000 per litre in April, Hoe points out.
“With this move, Indonesia seems to be taking a hard stance against hoarders of cooking oil from continuing with their activities, as its government may lift the price ceiling post-Lebaran (Eid),” says Hoe.
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By banning exports of crude palm oil (CPO) for an unknown period of time, the Indonesian government believes that exporters and distributors will have no choice but to flood the domestic market with oil. Indonesia produces 46 million tonnes of palm oil annually, of which 27 million tonnes are exported.
RHB believes that this would have the effect of raising the prices of CPO as well as other vegetable oils even further, on top of worsening inflationary pressures. “CPO exporters in Indonesia would suffer as a result, while downstream players with refining capacity would benefit, as there would be a significant shift in the demand-supply mechanics in the country, causing domestic supply to be abundant,” says Hoe.
She adds that there is also no guarantee that there will be additional supply released to the market. CPO refiners may decide to hold back their refined oil stocks to benefit from the higher prices, if and when the government lifts the ban. To be sure, refined oils can be kept for as long as 6-8 months with no impact on quality. After packaging, it can be kept for a further 12-18 months.
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Hoe has a “buy” call on Wilmar and Bumitama Agri while keeping “neutral” on Golden Agri-Resources and First Resources. Her target price for Wilmar, Bumitama, Golden Agri and First Resources are $5.30, 90 cents, 31 cents and $2, respectively.
As at 12.25pm, shares in Wilmar, Bumitama, Golden Agri and First Resources are trading at $4.51, 73.5 cents, 32.5 cents and $2.13 respectively.
