Industry overview

CPO prices

CPO has historically traded at a premium to Brent crude oil, and at a discount to soybean oil, although its current discount is near 0%. In 2022, the increase in CPO prices was due to supply shortages caused by shipping disruptions in the Red Sea. Lately, we have observed prices sustaining above USD1,000/ton. In our view, CPO prices will remain flat, above USD1,000/ton in 2025F due to droughts in Brazil and the B40 mandate, whereby Indonesia would put into practice a 40% palm oil-based biodiesel blend (B40).

Fig. 1: Oils prices comparison, 2013-2024

Global CPO demand grows, driven by the B40 mandate, while supply is expected to remain stagnant due to maturing trees in Indonesia and lack of land growth

Global CPO demand has increased from 65.1mn tons in 2016-017 to 78mn tons in 2023-24 (+2.6% CAGR), while global CPO supply has increased from 65.6mn tons in 2016 to 79.5mn tons in 2023 (+2.8% CAGR). We assume a stationary growth rate in demand of 2.8%, along with a one-time increase due to the B40 mandate of 2.2mn tons, bringing our 2025F CPO consumption forecast to 84.7mn tons. On the supply side, we assume a modest 0.5% CAGR, driven by the moratorium placed in recent years leading to minimal land growth, along with maturing tree populations in Indonesia and Malaysia.

Fig. 2: Global CPO production and consumption (‘000 tons)

Fig. 3: Global CPO consumption growth vs Indonesia biodiesel consumption growth (‘000 tons)

Indonesia and Malaysia are the biggest producers of CPO

According to the USDA, global palm oil production in 2023-24 was at 79mn tons. The two largest producers were Indonesia and Malaysia, producing 46.5mn tons and 19.25mn tons, respectively – this means that 59% of global palm oil was produced in Indonesia, and 24% in Malaysia. With two countries accounting for 83% of global production, and Thailand accounting for only 4%, Indonesia and Malaysia are the main countries to pay attention to, in our view.

Fig. 4: Percentage of global CPO production by country in 2023-24

CPO production in Indonesia and Malaysia has slowed recently 

In Indonesia, both CPO plantation land and CPO production have increased over the past 14 years. CPO plantation land in Indonesia increased from 7,900ha in 2009 to 15,500ha in 2023, up 94% in 14 years (+4.9% CAGR). CPO production in Indonesia also increased from 21.4mn tons in 2009 to 50.1mn tons in 2023 (+6.3% CAGR). Despite Indonesia’s sizeable expansion, growth started to slow in 2018, since the CPO moratorium was enacted on 19 September 2018. Because of this, CPO land only increased from 14.3mn ha in 2018 to 15.5mn ha in 2023, up 7.8% in five years (1.5% CAGR). Due to the maturing of planted trees, production increased from 42.9mn tons in 2018 to 50.0mn tons in 2023 (+3.1% CAGR).

Fig. 5: CPO land (000 ha) and CPO production (‘000 tons) in Indonesia

This suggests Indonesia’s strong CPO growth, but the same cannot be said of Malaysia. Malaysia’s CPO land saw little growth during this period, growing from 4.7mn ha in 2009 to 5.7mn ha in 2023 (+1.3% CAGR); CPO production increased from 17.6mn tons in 2009 to 18.6mn tons in 2023 (+0.4% CAGR).

Fig. 6: CPO land (000 ha) and CPO production (‘000 tons) in Malaysia

CPO Inventory

CPO inventory levels in Indonesia and Malaysia were fairly low in 2023 compared to their historical averages but have rebounded in 2024.

Fig. 7: CPO inventory levels (‘000 tons) in Indonesia

Fig. 8: CPO inventory levels ('000 tons) in Malaysia

Biodiesel mandate drives local CPO consumption

CPO production in Indonesia has increased over the past five years, but not nearly as fast as the increase in consumption. This rise is due to the B20 mandate that was first introduced in September 2018. The B30 mandate was later introduced in January 2020, and by August 2023 Indonesia increased the blending rate to 35%. There are also talks of increasing the blending rate even further to 40% by the start of 2025. We believe this is reflected in the increase in biodiesel consumption from 3.9mn tons in 2018 to 10.6mn tons in 2023. We forecast biodiesel demand will increase to 13mn tons in 2025, when the B40 mandate comes into effect.  

Fig. 9: Indonesia CPO consumption by use (‘000 tons)

Palm oil exports: Indonesia vs Malaysia

Palm oil exports have increased in Indonesia over the past 14 years, due to rising production from 16.83mn tons in 2009 to 26.13mn tons in 2023 (+3.2% CAGR). However, since 2018, exports have slightly declined, mainly due to the increasing local demand for biodiesel over this period.

Fig. 10: Palm oil exports (‘000 tons) in Indonesia and Malaysia

India, China, and Europe are the biggest buyers of Indonesia’s and Malaysia’s palm oil

Indonesia exports CPO to many countries. However, the two biggest buyers have consistently been India and China, importing 5.4mn tons and 4.2mn tons, respectively. India is Malaysia’s top export destination for CPO, followed by Europe, importing 2.7mn and 1.4mn tons of CPO in 2023, respectively. Europe has cut its CPO imports over the past five years, mainly due to the ESG scrutiny faced by the palm oil industry. 

Fig. 11: Indonesia's largest CPO export destinations (‘000 tons)

Fig. 12: Malaysia's largest CPO export destinations (‘000 tons)

Average age of trees should be 8-15 years

The CPO growth cycle looks typically like this:

● Age 0-3: Non-producing
● Age 4-7: Young, increasing production
● Age 8-15: Prime years
● Age 16-20: Old, decreasing production
● Age 21+: Replanting cycle

An ideal CPO company will have its average age in the 8-15 range. We can see from the average tree age of TAPG and its peers below that the trees of TAPG, on an average, are of prime age.

Fig. 13: Average CPO tree age, 2023 (years)

Impact of Indonesia’s B40 program 

The B40 program comes with its drawbacks, too, however. Due to crude oil being cheaper in nature, to replace crude oil with biodiesel would require additional subsidies, unless the burden will be taken on by the people. Subsidizing the biodiesel mandate is the role of the Badan Pengelola Dana Perkebunan Kelapa Sawit (BPDPKS), which collects revenue from levies and tariffs and use them to subsidize biodiesel and to provide funding for plasma farmers to help them replant.

As of end-2023, the BPDPKS had a budget surplus of IDR37.6tn. Below we calculate forecasts for the BPDPKS budget once B40 is rolled out in 2025.

New CPO levy structure should lead to higher prices for companies 

Previously, the CPO levy had a progressive rate structure. However, as of 19 September, this has made way for a flat 7.5% tax rate. While this affects exports, higher export prices will likely lead to higher local prices as well, creating an opportunity for TAPG. Below are the taxes on CPO exports before and after the change.

Widening POGO spread could lead to potential levy hikes

The POGO spread is the spread between palm oil prices and gasoline prices in MYR. We can use this to gauge the premium of CPO vs. gasoline. The higher the premium, the more expensive it would be to subsidize the biodiesel program as the additional cost of using palm oil instead of gasoline would be borne by the BPDPKS. Considering our spread has increased to 300 MYR recently as a result of the palm oil price rally, there is a chance for the levy to get adjusted again to support the biodiesel program.

Fig. 16: POGO spread, 2012-2024

CPO inventory levels in China and India

With China and India being the world’s largest CPO importers, we monitor their inventory levels to ascertain potential export volume of Indonesia. We can see that CPO inventory levels decreased y-y in August, with the most notable being India’s decrease from 758k tons to 422k tons (-44%). With inventory relatively low, we can expect their imports to sustain, with the potential to increase in the remainder of 2024.

Fig. 17: China CPO inventory levels (‘000 tons)

Fig. 18: India CPO inventory levels (‘000 tons)

Soybean production, imports, and exports

With palm oil usually trading at a discount to soybean oil, we need to consider soybean oil prices as well. Since soybean oil is merely a by-product of soybean, viewing the consumption and production trends of soybean is more relevant, since soybean is produced mainly to feed livestock and not to be transformed into soybean oil.

The majority of soybean is produced in Brazil, the US, and Argentina. In 2023-24, Brazil produced 153mn tons (39% of global production), the US produced 113mn tons (29% of global production), and Argentina produced 48mn tons (12% of global production) of soybeans, according to Trade Map. From April 2023 to April 2024, China has imported 100mn tons of soybeans, 72% of which came from Brazil, making it the largest soybean importer in the world. The huge demand for soybean in China is used to feed its livestock, primarily pork.

Fig. 19: % of soybean imports by country in 2023

Fig. 20: Soybean imports in 2019-2023

Fig. 21: % of soybean imports by country in 2023

Fig. 22: Soybean exports in 2019-2023 (mn tons)

Fig. 23: % of soybean production by country in 2023

Fig. 24: Soybean production in 2019-2023 (mn tons)

The largest exporters of soybean oil are Brazil and China, while the largest importers are India (33% of global imports). Despite being the largest importer of soybean oil, India’s imports of soybean itself are negligible due to the 32.5% import duty on soybean oil, tariffs imposed to protect the local agriculture. India’s and China’s soybean inventory levels have been relatively flat y-y.

Fig. 25: % of soybean oil imports by country in 2023

Fig. 26: Soybean oil imports 2019-2023 (mn tons)

Fig. 27: % of soybean oil exports by country in 2023

Fig. 28: Soybean oil exports in 2019-2023 (mn tons)

Fig. 29: China soybean oil inventory levels ('000 tons)

Fig. 30: India soybean oil inventory levels (‘000 tons)

Current drought in Brazil could be positive for prices of soybean oil, CPO

With Brazil facing drought currently, soybean supplies are likely to shrink in 2025. As a result, we believe this provides potential upside for CPO prices, as prices of soybean oil could increase.

TAPG

Two main segments – AMP and USTP

TAPG is a CPO producing company in Indonesia. It is split into two main holdings, AMP and USTP. AMP is its consolidated main business, in which TAPG has 95% ownership. AMP owns about 84.8k ha of nucleus CPO plantation and 18.1k ha of plasma CPO plantation. USTP is a 50-50 joint venture between TAPG and PT Union Sampoerna Triputra Persada (USTP, unlisted). USTP owns 51.6k ha of nucleus CPO plantation and 6k ha of plasma CPO plantation.

AMP CPO production 

In 2023, AMP produced 1.856mn tons of fresh fruit bunches (FFB) from its nucleus farms, 251k tons of FFB from plasma farms, and bought 821k tons of FFB from third parties. It processed a total of 2.928mn tons of FFB, producing about 667k tons of CPO and 208k tons of PK. This gives it a CPO oil extraction rate (OER) of 23.1%, and a CPO tons/ha yield of 4.73, one of the highest in the industry.

We forecast TAPG will produce 1.998mn tons of FFB, process 2.631mn tons of FFB in 2024F. We expect the decline in production to be driven by the aftermath of the El-Nino in 2H23, while the decrease in FFB processed will be driven by the increase in FFB prices, and disincentivizes aggressive third-party purchases, in our view. Overall, we estimate production of 604k tons of CPO (-10.8%) and 104k tons of PK (-19.9%) in 2024F.

We forecast the company’s 2025F CPO production to normalize to 633k tons (+4.7%) as a result of improving weather conditions from the aftermath of the El-Nino cycle in 2H23. We forecast its production to decrease in 2026F to 617k tons as a result of the company’s aging tree profile.

Fig. 31: CPO production yield in 2023 (tons/ha)

Fig. 32: TAPG CPO production (‘000 tons)

Increasing revenue driven by higher ASP

The majority of TAPG’s revenue comes from its CPO segment. In 2023, TAPG recorded a revenue of IDR8,326bn, of which IDR7,525bn came from the CPO segment, IDR700bn came from the PK segment, and other sources accounted for IDR100bn. This was a decline from the company’s 2022 revenue of IDR9.35tn (-10.9%). The decline was mainly due to slightly lower CPO sales that came from lower production numbers and lower FFB purchases. Furthermore, CPO prices in 2022 were considerably higher compared to those in 2023.

In 2024F, we forecast TAPG will record IDR8,642bn in total revenue (+3.8% y-y), IDR7,524bn from the CPO segment (+0% y-y), IDR755bn from the PK segment (+8.1% y-y), and IDR362bn from other segments (+254% y-y). This is driven by a high 9M24 ASP for CPO of IDR12,435/kg and PK of IDR7,012/kg, up from 9M23 ASP of IDR11,147/kg (+11.6% y-y) and IDR5,439/kg (+28.9% y-y). We forecast that the ASP for CPO and PK in 4Q24 will be stable, hovering around the 9M24 values at around IDR12,500/kg. This gives us an ASP of IDR 12,453/kg for FY24F vs. FY23 ASP of IDR11,115/kg (+12.0%).

In 2025F, we forecast TAPG will record a revenue of IDR9,947bn, IDR8,5421bn from the CPO segment, IDR1,043bn from the PK segment, and IDR 362bn from other segments. This growth is driven by the increase in ASP due to rising palm oil prices, along with lower levy. Our estimated average ASPs for CPO and PK in 2025F are IDR13,500/kg (+9.1% y-y) and IDR8,500/kg (+24.9% y-y), respectively.

In 2026F, we forecast TAPG’s revenue to decline to IDR9,713bn, mainly from the volume side, as we expect its FFB and CPO production to decline as a result of its aging trees.

Fig. 33: TAPG revenue (mn IDR) and ASP (IDR/KG) in 2019-2026F

Decreasing cost due to lower fertilizer prices

TAPG’s COGS can be split into three main categories: production cost for FFBs that it grows itself, purchasing cost for FFB it purchases from external parties, and depreciation of its mills. Production cost includes upkeep cost, fertilizer cost, harvesting cost, taxes, and other indirect costs. In 2023, TAPG recorded COGS of IDR6.11tn – IDR2,713bn  in production cost, IDR2,951bn from purchases of FFB, and IDR445bn in depreciation. Production cost in 2023 increased IDR 2,713bn from IDR 2,023bn in 2022 (+34.1%) despite the production of a similar amount of FFB. This was due to the sharp increase in fertilizer cost due to ammonia prices being high in 2023. Fertilizer cost in 2023 was recorded at IDR1,126bn compared to IDR667bn in 2022 (+68.9%).

With ammonia prices correcting lower in 9M24, TAPG’s fertilizer expenses have started to decrease. Its 9M24 fertilizer COGS stood at IDR645bn, a decline from its 9M23 value of IDR850bn (-24.1%). TAPG has also locked up its fertilizer prices until 2025, according to management, at prices similar to those in 2024. According to our channel checks, there is currently an undersupply of third-party FFB. Therefore, we forecast TAPG’s 2024F FFB purchase volume to drop to 632k tons (-23%) and its average purchase cost/kg to increase to IDR4,571. Overall, we expect TAPG’s FY24 COGS to stand at IDR 5,690bn, a 6.9% decrease y-y.

With fertilizer prices being locked in for 2025, we forecast fertilizer costs to remain similar to that in 2024. However, due to the rising cost of FFB, we forecast its FFB purchases cost/kg to increase from IDR4,571 to IDR5,300 (+16.0% y-y), with its volume of FFB purchased standing at 684k tons. Overall, we forecast the company’s 2025F COGS to be at IDR5,926bn.

Fig. 34: TAPG’s total COGS, 2019-2026F

Fig. 35: TAPG’s COGS breakdown, 2019-2026F

Fig. 36: Middle East ammonia and urea prices

Gross profit to rise sharply on higher CPO prices

In 2023, TAPG’s gross profit stood at IDR2.22tn with a gross margin of 26.6%. Due to its increasing revenue and decreasing COGS, we forecast TAPG's 2024F gross profit to be IDR2,952bn (+33.1% y-y), representing a gross margin of 34.2%. We believe this margin growth will be driven by a decrease in fertilizer price and an increase in CPO prices.

We forecast 2025F gross profit to be IDR4,020bn (+36.2% y-y), representing a gross margin of 40.4%. This margin growth will be driven by an increase in CPO prices and a decrease in the export levy, in our view.

Fig. 37: TAPG gross profit and GPM, 2019-2026F

50% stake in joint venture USTP

TAPG has a joint venture called USTP, established in 2007, in which it has 50% non-consolidated ownership. USTP’s earnings made up over 90% of TAPG’s joint venture income in 2023. USTP owns 57.6k ha of plantation, of which 51.6k ha are nucleus, and 6k ha are plasma. USTP produced 1,275k tons of FFB in 2023, a decrease from its 2022 production of 1,379k tons (-7.6%). TAPG’s 2023 net income from USTP stood at IDR643bn, a decline from its 2022 value of IDR968bn (-33.6%).

USTP's performance has been similar to that of TAPG’s AMP division, just on a smaller scale. Coupled with improving conditions in the CPO sector, we forecast USTP’s income will improve. USTP produced 859k tons of FFB in 9M24, a decrease from its 9M23 production of 962k tons (-10.7%). We forecast 2024F FFB production of 1,214k tons (-4.8%) and non-consolidated income of IDR725bn, a 12.7% increase y-y.

We forecast 2025F FFB production numbers to increase in 2024F at 1,319k tons (+8.7% y-y), with a higher non-consolidated income of IDR854bn (+17.8% y-y), driven by recovering production from the El-Nino effect that affected their 9M24 production.

Fig. 38: TAPG’s income from JV, 2019-2026F

Declining debt levels reduce leverage and interest expense

TAPG has used its cash flow over the past five years to significantly reduce its debt levels. It went from a debt-equity ratio of 1.13 in 2019, to 0.22 in 2023, and to 0.26 in 3Q24. Going forward, we expect TAPG to repay all its existing bank loans and working-capital loans, as has been the trend over the past five years.

Fig. 39: Debt to equity (2019-2026F)

Net income to rise in 2024F and to rise again in 2025F

TAPG recorded a net income of IDR1.63tn in 2023, down from its 2022 net income of IDR3.12tn (-46.6%). Its net margin also dropped to 20.0% from 33.4% in 2022. The company’s low FY23 net income was due to rising fertilizer prices, along with lower CPO prices. In 9M24, TAPG recorded a net income of IDR1,617bn, an increase from its 9M23 net income of IDR1,139bn (+47.2%). We forecast 2024F net income of IDR2,331bn (+45.0% y-y) with net margin of 28.3%.

We forecast the company's net income in 2025F to be IDR3,162bn (+35.6%% y-y) with a net margin of 33.4%. The main drivers for an increase in margins would be higher CPO prices, lower finance cost, and lower levy rates.

Fig. 40: TAPG’s net profit and NPM, 2019-2026F

Dividend payout to remain strong in 2024F and 2025F

TAPG has historically maintained a dividend payout ratio (DPR) of about 30%. In 2023, however, it paid a much higher dividend. This was due to the need of the founding family to facilitate the buyout of GIC. Because of this, it paid a dividend of IDR1.81tn in 2023 (113% DPR), which was then used to buy out 13% of TAPG from GIC. GIC still owns about 12% of TAPG, and with what we view as the family’s intention to eventually buy out GIC’s stake, we expect a relatively high DPR for 2024F. We are forecasting DPRs of 50% for 2024F and 2025F, suggesting dividends of IDR1,221bn and IDR 1,660bn, respectively. This equates to a dividend of IDR61/sh and IDR84/sh for 2024F and 2025F, respectively.

Fig. 41: TAPG’s dividends and DPR, 2020-2026F

Fixed assets

As of June 2024, TAPG’s fixed assets amounted to IDR7,406bn, about 56% of its total assets. Of this IDR7,392bn, IDR3,654bn comes in the form of mature palm oil trees, IDR1,316bn in buildings, IDR607bn in machines, IDR579bn in vehicles, and IDR472bn in land.

In terms of capex cycles, TAPG plans on replanting 4k ha of land a year for the next three years. 1k ha costs about IDR60mn to replant, with the capex allocation split among its non-producing lifetime (three years). 50% of the replanting capex is incurred in the first year, 20% in the second year, and 30% in the third year. This means a 4k ha replanting would cost IDR120bn in the first year, IDR48bn in the second year, and IDR72bn in the third year.

Valuations

The peer valuation table below shows that TAPG leads the industry in several respects: the highest sales growth of 15.1% in 2025F, a high 2025F net profit growth of 35.6%, and the highest 2025F ROE of 25.5%. TAPG’s mean P/E since its IPO in 2022 is 6.5x, with a standard deviation of 1.9. We value the company at 8.0x 2025F P/E, in line with the industry average of 8.7x. This equates to a 0.79 standard deviation above its historical mean since the IPO. The table below uses our estimates for TAPG and Bloomberg estimates for DSNG, AALI, and LSIP.

Fig. 43: TAPG’s TTM P/E band (since IPO)

Risks

The main risk with TAPG is the volatile nature of CPO prices. Many factors can affect CPO prices, such as the price of soybean, the price of crude oil, government mandates such as B40, and overall supply-and-demand fluctuations.

Another risk is the possibility of export duties being levied again at progressive rates. As previously mentioned, the BPDPKS is forecast to operate at a deficit, mainly due to the decrease in export levy along with the increase in the spread between crude oil and CPO. If the deficit continues to deepen and the BPDPKS exhausts its current budget surplus, there is a possibility that the export levy gets hiked back to its original progressive structure.

Finally, TAPG is susceptible to fluctuations in weather, which will ultimately affect their CPO yield.

Sustainability

TAPG is a sustainable CPO company, opening doors to potential ESG-conscious investors, in our view. The company is a member of the RSPO (Roundtable on Sustainable Palm Oil), which is a non-profit organization that unites various stakeholders from the CPO industry with the goal of promoting the growth and use of sustainable palm oil.