Plantation sector comparison TA Bloomberg Oct 2016

Cooking oil subsidy withdrawal no impact on planters

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KUALA LUMPUR — Following reported progressive withdrawal of cooking oil subsidies over the next year, local research house TA Securities has maintained its “underweight” call on the plantation sector, citing neutral impacts from the proposed cut.

The structure of the Cooking Oil Price Stabilisation Scheme is about to change from next month as part of government subsidy rationalisation plan, according to a source from the Malayan Edible Oil Manufacturers’ Association.

The new structure will be restructured into two phases — the first phase starting from Nov 1 until the end of the year and the second phase beginning from next year onwards.

In the first phase, the government will only subsidise the 1kg polybag and 5kg bottle cooking oil. The selling price for the 1kg polybag will increase from RM2.50 to RM2.90 while the 5kg bottle will increase from RM13.35 to RM15.25.

After that, all consumer pack sizes including 500g, 1kg, 2kg, and 3kg bottles will no longer be subsidised by the government and will be selling at open market prices.

“We believe that the new scheme will have a neutral impact on the plantation industry. As we know, Sime Darby Bhd and Felda Global Ventures Holdings Bhd (FGV) are the only listed cooking oil producers locally,” TA Securities plantation analyst Angeline China noted in a sector report yesterday.

“According to Sime Darby, the earnings contribution from the cooking oil division is minimal and most of its cooking oils are selling at wholesale prices.

“Note that Sime Darby’s mid and downstream operations contributed about RM241.6 million or around 8% of the group’s total operating profit in FY16.

“While for FGV, we gather that it has three cooking oil brands in the market namely Saji, Tiara and Tiga Udang under its fast moving consumer goods (FMCG) sub-cluster, Delima Oil Products Sdn Bhd.

“Among the three, Saji is the most popular brand and currently available in three package sizes – 1 kg, 2 kg and 5 kg. The FMCG sub-cluster’s profit before tax was RM14.3 million or circa 4% of the group’s total pre-tax profit in FY15,” she added.

The analyst believes the demand for cooking oil is unlikely to shrink as it is a necessity for every household.

Chin said that while a short-term stocking-up now effect followed by off-loading later is possible,

overall demand is expected to normalise after that.

As such, TA Securities reiterated its “underweight” recommendation for the plantation sector while maintaining “sell” call on IOI, Kuala Lumpur Kepong, Sime Darby, FGV, IJM Plantations and Indofood Agri Resources, due to pricey valuations. Meanwhile, United Malacca, and Wilmar are rated as “hold”.