26/03/2013 (The Sun) - The European Union's (EU) proposed plan to tax palm oil and its related products out of Malaysia could have a mild negative impact on companies like IOI Corp Bhd, Kuala Lumpur Kepong Bhd and Sime Darby Bhd, which are larger exporters of downstream products to the EU, Alliance Research said in its report yesterday.

"That said, companies like KLK and Sime Darby have downstream facilities (refineries) being built in Indonesia, and this could help buffer the overall impact from these taxes. As for IOI, they could escape unscathed if taxes do not apply to crude palm oil (CPO) exports, as the group's downstream facilities are located in the EU," it added in its report.

Palm oil and its related products exported to the European Union (EU) could be taxed from 3.8% to 6.5% once Malaysia loses its Generalised Scheme of Preferences (GSP) status next year, but companies building downstream facilities in Indonesia may help buffer the impact from the taxes, according to Alliance Research which was commenting on a business weekly's report on the issue.

Indonesia will continue to enjoy GSP status next year.

The report went on to say that the taxes is unlikely to impact palm oil's competition with other oil seeds as palm oil would still be one of the cheapest edible oil in the market.

Palm oil price may however, be on par with rape seed oil which is largely used for biodiesel production.

For the first two months of this year, exports to the EU made up 12.4% of total Malaysian palm oil product exports.

"There has been an emergence of new and growing export markets like India, Iran, Egypt and Ukraine in recent years and these new markets could help to buffer the impact of lower exports to the EU, should it come to pass."

Alliance Research added that these taxes could also be averted if Malaysia and EU finalise the Malaysia-EU Free Trade Agreement (MEUFTA) by next year.

The MEUFTA was to have been completed by mid-2012, but there has been no developments to talks so far, it said.

The research house maintains its underweight recommendation on the sector, and continues to expect another volatile year for the sector in this year, with CPO prices averaging at RM2,600/mt.

"Current high inventories coupled with a healthy production outlook is likely to keep CPO prices subdued in the interim.

Continued competition from Indonesian exports will also bode negatively for Malaysian exports."

Alliance Research has a sell recommendation on Felda Global Ventures Bhd with a target price of RM3.10; IOI Corp with a target price of RM4.05, Genting Plantations Bhd with a target price of RM6.68 and Kim Loong Resources Bhd with a target price of RM1.73.

It is neutral on Sime Darby, KLK and IJM Plantations Bhd.