Based on recent reports, it seems the Government is looking at reviewing the windfall tax on the palm oil industry, Deputy Prime Minister Fadillah Yusof said Putrajaya hopes to complete its review on the existing windfall tax by next year.
With the announcement, investment house MIDF takes a look at KLK as a case study, for FY21-22; the breakdown of Cess & Taxes paid by KLK for FY21-22 showed a contribution of 2%-3% for MPOB, 49-60% for Malaysia Export Tax, 12%-29% for Windfall Profit Levy, and 26%-20% for Sabah Sales Tax. KLK was taxed at a higher rate of 15% (CY21: 7.5%) in FY22, totalling RM110m. This was in line with the higher average CPO realized at RM4,774/Mt, which unfavourably affected core profits but still came in higher at RM2.17b. The house anticipates KLK’s windfall profit tax to be significantly lower at RM40 million, given the lower average CPO realised this year bringing decent earnings of RM1.52b for the full financial year.
Based on its 2QFY23 performance, MIDF observed input (fertilizers) of production cost had eased. In fact, the price index had fallen to 167.9 pts, and notably, feedstock for fertiliser including urea, phosphate, and potassium has stabilized. Meanwhile, natural gas prices in Europe dropped, therefore, it expects most of the planters will incur lower operational expenses in 2HCY23, at least, due the typical industry practices that fertilizers stocks to be locked in 6-12 months in advance.
However, the cost of production for 1HCY23 was still high due to higher locked-in fertilizer prices in 2HCY22 (the weighted
average cost of production for fertilizers increased from 15% to 30% last year) and high labor costs. All in all, this
would consequently result in ceteris paribus of production cost in CY23. Since there is not much change in costs of
production for planters in this year, we’re seeing the revision for windfall profit levy remain status quo now, however,
it can be tweaked higher for2024 based on lower locked-in fertilisers price and in anticipation of higher average realised CPO price (forecast RM4,200/Mt).
As planters appear to have more room to absorb windfall profit tax, this will allow the government to adjust a larger
windfall profit levy in CY24-25.
All factors considered, MIDF maintains NEUTRAL on the sector with CPO target price of RM3,800 Mt for CY23.
