PLANTATIONS

Plantation Day - biodiesel theme
We hosted an Indonesia Plantation Day with a focus on the country’s biodiesel efforts. Overall, we are more optimistic on the biodiesel programme as we gather that the biodiesel tender is not the only avenue Pertamina is pursuing to secure biodiesel to meet the higher mandate, contrary to some expectations. The government appears ready to overcome any challenges to ensure the mandate is met. We expect the second biodiesel tender results by Pertamina to show a favourable take-up rate as the pricing mechanism for biodiesel has improved. However, our Neutral stance on the sector is intact. Our top picks are First Resources, Wilmar, AALI, LSIP and Ta Ann Holdings.

What Happened
CIMB hosted a plantation day conference in Jakarta on Wednesday to provide investors the opportunity to hear from six industry experts on the progress and challenges facing the various stakeholders in meeting Indonesia’s higher biodiesel mandate effective 1 Jan 2014, as well as on production and fertiliser price prospects. Also at the conference were representatives from 8 plantation companies who met with investors in one-on-one and small group discussions.

What We Think
We are more positive on the execution of the Indonesia biodiesel mandates after the key stakeholders pledged their readiness in meeting the higher target. Recently, the market was disappointed when Pertamina revealed that it had secured only 18% of its intended target of 6.6m kl for 2014-15 during its first biodiesel tender. The good news we hear is that that the second tender is likely to attract a higher take up rate as Pertamina has improved the pricing mechanism. Also, Pertamina is willing to revert to the old pricing formula for the remaining supplies that are not tendered out and is committed to fulfilling the mandate. PLN indicated that it is making good progress in meeting its 20% mandate which is also a positive takeaway for us.

What You Should Do
If successfully executed, this could raise the biodiesel usage in Indonesia from 600k-1m kl in 2013 to around 3.3m-4m kl. This will, in turn, reduce the palm oil exports from Indonesia and boost CPO price prospects. We believe the market has not priced in the additional biodiesel demand potential from Indonesia due to concerns over pricing and logistics challenges. However, a successful tender and improved pricing for biodiesel could change market’s perception. We maintain our view that the government will raise its usage to
2m kl in 2014, lower than its target of 3.3m-4m kl. But there could be an upside surprise if it is able to secure most of the intended supply through the tender process. We keep our average CPO price forecast of RM2,700 per tonne for 2014, Neutral stance, and preference for selected planters.

Key takeaways from luncheon discussion
Below, we highlight the key takeaways from our six expert speakers who represent the various stakeholders in the biodiesel and plantation industry. Dr. Dadan Kusdiana, Director of Bioenergy at the Directorate
General of New & Renewable Energy and Energy Conservation, at the Ministry of ESDM.

Dr. Dadan Kusdiana indicated that the biodiesel policy has been in place since 2008 and, as such, it is not a new policy for the market. However, what has changed is that the government is raising its targeted blend of biodiesel with diesel to 10% (from 7.5%) and expanding the coverage of the blend to include
all regions of the country compared to only 70% last year.

He said the government is committed to this policy. Biodiesel demand in Indonesia is projected to grow by 400% to 3.8m-4m kl in 2014 vs. around 1m kl of consumption in 2013.

The biodiesel tender programme was an idea initiated by Pertamina to secure long term biodiesel supply to fulfill the mandate. Should the tender fall short of requirements, Pertamina will revert to the old process of buying biodiesel at spot prices, where the reference price will be based on HPE (Harga Patokan Eksport or the exports reference price) for biodiesel. A successful tender exercise will be positive as it will allow the government to keep to its fuel subsidy budget, which is based on MOPS (Mean of Platts Singapore), a measure of fuel oil pricing in Singapore .

He clarified that not all the biodiesel needs will be supplied through Pertamina's tender process, contrary to some expectations. The government is currently still adopting the previous pricing index, which is based on reference export price for biodiesel (HPE) set by Minister of Trade, and that involves buying biodiesel on the spot market to meet the 10% biodiesel blend.

He guided that Indonesia achieved a 5% biodiesel blend in 2013 and is confident that the 4m kl biodiesel target is achievable as the country has sufficient biodiesel capacity (5m kl). He said the government is willing to work with industry players to overcome near-term challenges to ensure that the 10% blend is implemented.

We are positive as Dr. Dadan has helped clarify that the low take-up rate from the first tender by Pertamina will not hamper the government's goal of meeting its target. This is because this is only one of the many avenues rather than the only means that Pertamina is adopting to source its biodiesel requirements. We view this positively as the market may have earlier jumped to the conclusion that the biodiesel tender is the only means of Pertamina securing its supply.

Mr. Toto Nugroho, New & Renewable Energy Business Development Manager, PT. Pertamina (Persero).
Pertamina (97% market share of Indonesia's retail petroleum sales), the state-owned oil company, has successfully raised its biodiesel usage, in line with the higher mandates. Mr. Toto Nugroho revealed that in Jan-Sep 2013, Pertamina's average consumption of biodiesel was 65,000 kl per month. Since the mandate was raised in Oct 13, usage has increase to 120,000-150,000kl per month. He said the company is supportive of this policy as it could potentially reduce Indonesia's imports of crude oil by US$1bn, and is confident that this programme can be implemented.

On the tender issue, Pertamina has secured 18% of its 6.6m kl requirements from the first biodiesel tender and has called for a second tender. The results of the second tender will be officially disclosed on 21 Jan.

We understand the results are likely to be significantly more than the 18% achieved in first tender which will be a boost to biodiesel demand. The second tender pricing is based on MOPs (flat) vs. the first tender which was based on MOPs minus.

He also indicated that the company is open to the possibility of improving the pricing to include logistics costs for biodiesel supply to the eastern part of Indonesia due to the challenges of higher transportation costs. This means pricing for biodiesel supply to these areas could be MOPS plus.

He also clarified that the first biodiesel tender is to meet biodiesel needs for 2014-15, while the second tender is mainly to cater to supply needs for 2014 only.

If it is not able to obtain sufficient supply based on the MOPS-based pricing scheme tender, Pertamina will revert back to the previous HPE pricing scheme and secure the requirements through the spot market.
In terms of the breakdown of the 3.3m kl tender, we gather that the transport (PSO or subsidised fuel) market accounts for 1.7m kl of the planned usage.

The key takeaway for us is that Pertamina is willing to look at other pricing methodologies to secure biodiesel supply for the mandates and is not giving up due to the poor take-up from the first tender.

Mr. Moch. Sofyan, Head of New & Renewable Energy Division, PT. PLN (Persero)
PLN (85% share of total electricity generation in Indonesia), the state-owned electricity company, has been preparing to blend biodiesel into High Speed Diesel (HSD) since the government announced the higher biodiesel mandate. We gather from Mr. Moch. Sofyan that PLN is looking at three options to blend biodiesel, RBD olein or CPO with its diesel fuel to be consumed in the power plants. Below are the key takeaways of the three options:
(1) Pertamina to help secure and supply biodiesel. He indicated that PLN is ready to raise the biodiesel blend in its power plants to 20% as long as Pertamina is ready to secure and transport diesel to the power plants, and we gather that Pertamina is now ready to do so.
(2) Mixing palm olein with diesel fuel. The company is looking at an alternative option of mixing palm olein with diesel fuel, though this may require some modification at its power plants. This will reduce its dependence on Pertamina to supply biodiesel to the plants and it is targeting to achieve a 6% blend for this.
(3) Building power plant which uses CPO as feedstock. It is also exploring the possibility of building power plants that use CPO as feedstock.

PLN is currently achieving a biodiesel blend of 12% and plans to raise this to the 20% target. We are pleasantly surprised by the readiness of PLN, which has been a dark horse for us, in embracing the higher biodiesel blend set by the government.

Mr. Aslam Kalyubi, Director of Biofuel Producers Association (APROBI)
The Indonesia Biofuel Producers Association has 23 members but only 12 members are currently active in providing supply to Pertamina. The industry has been going through volatile times. 2013 was a good year for the Indonesian biodiesel producers. Total installed biodiesel capacity in Indonesia is more than 5m kl per annum. Mr. Aslam Kalyubi estimate that in 2013, domestic biodiesel usage was 600,000 kl. He indicated that the biodiesel producers are ready to provide the supply required to fulfill the higher biodiesel mandate.

However, he believes that the policy has not been progressing smoothly due to the issue of pricing as Pertamina's tender pricing was based on MOPS instead of the export reference price of biodiesel from Indonesia.

If Indonesia successfully executes the 10% biodiesel blend, he estimates that this will boost the country's biodiesel demand to 3.5m kl and if a 20% blend is adopted, the biodiesel usage in the country will grow to 7.6m kl by 2016. Hence, more investments will be made in the industry. He said the association hopes the government will take the lead in the biodiesel programme and that the biodiesel producers are ready to support the government’s initiatives as long as the pricing for biodiesel is viable.

Apart from pricing, he indicated that logistics is the other challenge as most of the biodiesel plants are located in Sumatra and Java which makes it very expensive to transport biodiesel to the Papua and Kalimantan regions.

Mr. Fadhil Hasan, Executive Director of Indonesian Palm Oil Association (GAPKI) Mr. Fadhil Hasan is fully supportive of the biodiesel policy as it will be positive for CPO price prospects and benefit all the palm oil producers. However, he acknowledged that the pricing issues for biodiesel need to be addressed. As
such, he hopes the government and stakeholders will come together to work out a pricing policy that will be positive for all key stakeholders.
From the planters’ perspective, they are ready to supply the feedstock for the biodiesel industry and are very keen on this as it will provide a new outlet for their palm products.

He predicts CPO price (Rotterdam cif) could trade higher at US$900-960 in 2014 against US$857 per tonne in 2013.

On the issue of supply, he estimates that Indonesia produced 27m tonnes of palm oil in 2013, which is lower than earlier estimates of 27.5m tonnes due to weather issues. However, palm oil exports from Indonesia have improved from 17m tonnes in 2012 to 19m tonnes in 2013 due to the lower pricing of CPO at the start of 2013. He estimates palm oil supply rising to 28.5m-29m tonnes in 2014.

He predicts a slowdown in the palm oil supply growth from Indonesia as expansion has slowed due to new regulations in the industry. This is supported by the drop in sale of seeds from 160m in 2012 to 100m seeds in 2013.

His CPO price forecast is broadly in line with our average price assumption of US$930 per tonne (RM2,700) for 2014 and we concur with his assessment that expansion in Indonesia has slowed, and this will reduce future CPO supply growth from Indonesia.

Mr. Johan Unggul, Chairman of Indonesian Fertilizer Trade Association (ANPI) Mr. Johan Unggul said that, as an observer, he was optimistic that the biodiesel programme will proceed but thinks that the progress of implementation may be slower than expected. He believes the bioodiesel policy is needed by all stakeholders to offset the rising CPO supply. He thinks three years is an achievable target to meet the 10% blend but worries about the ability of the industry to raise the usage to a 20% blend.

He said 2013 was a bad year for fertiliser suppliers in Indonesia due to the high inventory level and overcapacity. This pushed down fertiliser prices, which is positive for planters. He expects most fertiliser prices, except for Potash, to improve slightly in 2014.

Key takeaways from company meetings
Astra Agro Lestari (AALI.IJ – Add)
We gather the company’s key focus for 2014 are to: 1) continue its downstream expansion, 2) pursue diversification opportunities, and 3) continue to manage its costs of production. Its CPO refinery in Sulawesi has started operations in Jan 14. The company is also planning to add more milling capacities in 2014. It
also expressed interest to JV with other parties to further expand its downstream business. It recently diversified into rubber business and indicated that future rubber supply will be sold to its sister company Astra Otopart, which manufactures Pirelli tyres. The company plans to plant 2,000 ha of rubber this year, on top of its existing planted rubber area of 500ha as of 2013. It plans to further expand mechanisation to manage costs. We maintain our Add call with a target price of Rp28,000.

Austindo Nusantara Jaya (Not rated)

BW Plantation (BWPT IJ, Hold)
The company is shifting its focus to managing its balance sheet capabilities following years of aggressive new planting activities. This has caused the group's gearing to reach 2x as of 9M13. It plans to refinance some of the loan in the near term. As for new planting, it plans to plant 3,000 ha per annum in 2014-2016. It plans to spend Rp700bn on capex this year, of which Rp500bn-550bn will be allocated for planting purposes, while the other Rp150bn will be used to build a palm oil mill with 60t/hr capacity (expected to fully operate in 1Q14). It is optimistic that production will recover in 2H14. We keep our Hold call with a target price of Rp1,320.

First Resources (FR SP, Add)

Golden Agri (GGR SP, Hold)

London Sumatra (LSIP IJ, Add)
The key takeaways from the meetings with LSIP are: 1) the company expects to achieve a high single digit growth FFB output for 2014; 2) the average age of its estates is 12.3 yrs, 3) it targets to plant 5k ha of palm oil area per annum and has an unplanted land bank of 25k ha; 4) its target capex spend for 2014 is Rp1trn, 5) it projects more manageable cost increases for 2014, with labour cost rising at 10-15% but fertiliser costs remaining fairly stable; and 6) it experienced lower seeds sales volumes in 2013. We reiterate our Add call with a target price of Rp2,180, based on 12.8x CY15 P/E, a 25% discount to industry
leader.

Sampoerna Agro (SGRO IJ, Reduce)
The main takeaways are: (1) it is targeting 20% FFB output growth for 2013; (2) projects cost to rise due to higher minimum wage and fertiliser usage as 7,000 ha of new mature areas will come on stream in 2014.; (3) its new planting rate target are 5,000 ha of palm oil, 2,000 ha of rubber and 1,000 ha of sago; (4) its current plantable reserves is around 56k ha; and (5) its target capex spend for 2014 is around Rp1tr.We maintain our Reduce call with target price of Rp1,160 as SGRO’s premium P/E implies that its earnings recovery prospects have been more than priced in.

source: CIMB research dated 17 January 2014