RHB Bank Singapore analyst Hoe Lee Leng is maintaining her “overweight” call on the plantation sector with Bumitama Agri as one of her top picks following a meeting with the Indonesian Palm Oil Association (GAPKI).
In her Dec 19 note, Hoe says the B40 biodiesel mandate is likely to stick. RHB believes the Indonesian government will do what it takes to ensure the B40 mandate is implemented in 2025, although there could be changes to the policies made along the way.
Biodiesel mandate is still the main growth driver of consumption in 2024 and 2025, says Hoe. GAPKI projects biodiesel consumption of 11.6 million tonnes in 2024 and 14.01 million tonnes in 2025, based on the B35/B40 mandate for 2024-2025.
However, funding for the B40 mandate will still be an issue, especially if there is less crude palm oil (CPO) available for export, translating to less levy collected for the biodiesel fund.
To this end, GAPKI sees several options. First is to revise the levy higher — this is something that is already in discussion and is likely to happen in 2025, says Hoe. “We believe that despite possibly affecting planters’ earnings, it could be offset by sustained higher CPO prices,” says Hoe.
Second is to reduce the amount paid to produce biodiesel to biodiesel players by only subsidising the public service obligation volumes, potentially punishing biodiesel players in Indonesia. The biodiesel price could also float for the non-public service obligation volumes, causing the public to pay more for using biodiesel, punishing consumers of diesel.
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Lastly, the implement B40 could be done in phases — to only implement in major areas and push implementation to other smaller areas to a later date. Alternatively, all of the options can be combined.
“We believe the Indonesian government is unlikely to back down on the B40 mandate, although we do highlight that at the current palm oil and gasoil spread, the biodiesel fund is likely to be depleted before the year end.
“As such, we should be prepared for changes like the options highlighted above to come through in the near future — which could be detrimental to Indonesian planters’ earnings but offset by sustained higher CPO prices,” says Hoe.
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As at 10.28am, shares in Bumitama Agri are trading 0.5 cents lower or 0.57% down at 87 cents.
