Fig. 1: Stocks for action

How we value Indonesia CPO stocks

We argue that CPO prices should rise higher than 2010-2020 levels as the current weakness in supply is more acute while demand from biodiesel continues to rise, which should push CPO prices into a strong upcycle. Moreover, other vegetable oil substitutes have similar supply and demand dynamics and should support CPO prices. Indeed, CPO prices have sustainably stayed above USD1,000/ton since 2023 (vs. an average cash cost of USD770/ton), delivering large profitability for CPO players. We use a conservative target multiple of 8-12x PE to value Indonesia CPO stocks, compared to 21x average ASEAN P/E in 2010-2020), also at a 25% discount to Malaysia CPO stocks on average, as we incorporate higher risks of potential unfavourable government policies and ESG discount. Our three preferred CPO stocks are TAPG > DSNG > LSIP.

We choose TAPG as our top pick, in view of its: 1) high productivity, backed by a relatively young plantation age profile of ~15 years old; 2) lowest cash cost among domestic listed companies, thanks to its operational excellence; and 3) has the highest dividend yield. The company has the capability to pay high dividend as it has largely completed its infrastructure buildout and is in a significant net cash position.

DSNG is our second pick. The company also has a similar plantation age profile, and hence is producing high output. The company is also gradually reducing debt, boosting its NPAT further. However, management is actively developing downstream businesses and accelerating its replanting program, which could put a cap on its dividend payout ratio.

Our third preferred stock is LSIP despite its older plantation age profile, but its cash cost remains very efficient compared to peers, in our view. Besides, we think LSIP’s current valuation is inexpensive.

These three stocks are domestic CPO players, not exporters; thus, we believe it would be more relevant to use Indonesia final local CPO prices to analyze their businesses.

Downside risks to our investment views are mainly unfavourable government policies, especially if DSI (Indonesia export body) acts as sole trader. But we view this scenario as unlikely as a monopsony model is not feasible. Even if the government were to experiment on this model, it would only be temporary as the authorities will likely change the policy considering the significant damage inflicted on farmers income and the Rupiah. Therefore, in this report, we assume DSI would act only as an agent to monitor and supervise the sector.

Fig. 2: ASEAN CPO firms’ operating cashflow (OCF) yield improvement aligns with CPO price movement

Fig. 3: ASEAN CPO firms’ valuation (P/E) versus CPO price

Fig. 4: CPO peer comparison

Fig. 5: CPO companies cash cost comparison (USD/ton) (2025)

Risks that could undermine our thesis

• Assigning DSI as a sole trader can disrupt the supply chain of the CPO industry, such as weakening local CPO prices significantly. In terms of operation, we believe implementing a monopsony model in the CPO industry will bring extreme high risks, given lack of capability in terms of human resources, infrastructures, and capital. Politically, it also produces additional complexity as there are many conflicts of interests and law enforcements issues. An instant implementation of a sole trader model would immediately destroy local CPO prices as export trading activities will deteriorate in a rapid pace, resulting in massive losses for farmers, and at the same time damage government popularity significantly, in our view. This policy will also widen trade deficit considerably, as well as weaken the Rupiah and Indonesia’s fiscal position. All in all, we think the total damage would be too big. That said, logically, the government should maintain DSI’s role as a monitoring agent only, not as a sole trader. Currently, with DSI acting as a monitoring agent, it does not pose significant harm to the CPO ecosystem, in our view. However, in a worst-case scenario, that is, if the government experiments with the policy and forces a monopsony model immediately, we risk seeing significant economic turbulence. Nonetheless, if such were to happen, we believe the government will do a quick correction and fix the issue fast, as it understands the huge damage inflicted especially on farmers’ wealth.

• If the government decides to cut biodiesel mandate blending requirements, we believe the demand for CPO locally will deteriorate substantially, which would then disrupt CPO prices. Note that currently Indonesia CPO demand mostly comes from the biodiesel program. However, we think the probability of this happening is low, as this programs politically benefits the government, especially given that the program is pushing CPO prices higher, supporting farmers’ income and reducing import dependency that aligns with Indonesia’s energy self-sufficiency plan. Imposing a higher levy to support the biodiesel expansion program is also futile, in our view, as it will be fully compensated by increased CPO prices.

• With a tight fiscal position, there is a possibility of the government imposing a new tax on the natural resources industry, including CPO. Any additional expenses for CPO firms will drag down earnings directly. Hence, we put a substantial valuation discount on Indonesia CPO stocks due to uncertainty risks associated with government policies.

Significant drop in CPO inventory

We project CPO inventory levels in Indonesia and Malaysia (combined account for ~85% of total global supply) to erode in a rapid pace in 2026-27F. We estimate the combined CPO inventory level of Indonesia and Malaysia will reach below 4mn tons by 2027F, the lowest in the past one decade. Based on our projection, Indonesia may experience the biggest drop in inventory level. We believe the deterioration of CPO inventory level will be caused by three major factors: 1) structural pressure on CPO production yields. Indonesia and Malaysia’s plantation age profile continues to decline, with mature trees producing lower harvest yields. Indonesia, as the largest global CPO producer, cannot afford to rejuvenate its smallholder plantation (45% of total plantation areas) due to very high costs and lack of quality palm oil seeds. We also believe the inefficient operation of confiscated land under SOE will result in lower harvest yields. These confiscated lands are currently close to 1mn ha or equivalent to 8% of total Indonesia planted areas. Additional production pressure may come from expensive fertilizer prices as smallholder farmers are likely to cut fertilizer usage. The same could also happen to other crops; 2) biofuel mandate expansion. Indonesia’s B50 implementation would be the main booster for global demand, in our view. In addition, the recent energy scarcity issue is forcing many countries to increase their biofuel blending to strengthen their energy security; and 3) the rise of other vegetable oil prices to support CPO demand. Other crops such as soybean and sunflower oil may also face lower production yields in the future owing to rising fertilizer costs. On top of that, more countries have expanded their biofuel programs, boosting demand for vegetable oils. Higher vegetable oil prices, as product substitutes, will help to sustain CPO prices. With El Nino developing in 2026, this is also disrupting production yields. Fundamentally, a lower inventory level should translate to a higher CPO price; hence, companies with a higher production yield would benefit the most. We believe TAPG and DSNG would witness superior revenue and earnings growth, given their relatively young plantation age profile and operational excellence, while LSIP also should enjoy improved profitability.

Fig. 6: Indonesia + Malaysia inventory level (85% of global supply) decline structurally, driving up CPO prices

Fig. 7: CPO production, consumption, and export contribution to total global

We forecast Indonesia’s CPO inventory levels to continue to deteriorate as domestic demand rapidly increases, owing to the biodiesel program expansion. We expect the B50 implementation to consume a big proportion of the country’s exports, and that domestic demand is likely to match its exports size by 2027F. Meanwhile, we project production to remain stagnant as smallholders (account for ~45% of Indonesia’s total plantation areas) have a higher concentration of older trees with low productivity and there is no clear directives/discipline regarding replanting. Given the accumulated number of unproductive trees over the years, we believe starting a replanting program for smallholder farmers is too late, especially considering the huge cost to be incurred. On top of that, we learn that there is not enough good quality palm oil seeds for such large replanting. Moreover, given the current energy scarcity issue, farmers also are likely to reduce fertilizer usage due to expensive costs, which should erode production yields 1-2 years later, based on our calculations. We understand there are about 1mn ha of productive confiscated lands under SOE management. These lands are likely to have low maintenance and low operational state due to lack of skilled labours, which are resulting in lower harvest yields. In our view, to reverse the production trend, the government needs to add new proper plantations; however, we believe execution would be extremely difficult, given limited budget and lack of skilful labours.

Fig. 8: Indonesia Inventory level has declined steeply

We think the Indonesia government will continue to develop biodiesel blending mandate beyond B50 as its main priority is to reduce energy import dependency although it might not be economically viable. A biodiesel program will consume most of the country’s export proportion while we also expect the government to maintain its domestic market obligation (DMO) for cooking oil (to maintain cooking oil supply). We note that CPO for cooking oil supply currently hover at 9mn tons. Therefore, we should see a structural declining export trend in the future.

Fig. 9: Indonesia palm oil domestic demand breakdown

Based on our conservative projections, ceteris paribus, we believe Indonesia’s CPO funds can still afford to run B50 with a minimal levy hike of 2.5%-5%. However, given the ongoing geopolitical tension in the Middle East, we believe at the current stage, the Palm Oil Plantation Fund Management Agency does not need to raise levies to raise CPO fund, as the size of subsidies for Indonesia’s biodiesel programs could be much lower, given the gap between oil price and CPO price is narrowing. Even if oil cost surpasses CPO prices, we believe the fund will not be used for subsidies for biodiesel; hence, the biodiesel program becomes more sustainable. In terms of timeline, the government has gradually started the B50 mandate in July-26 gradually, but the government must use up the remaining B40 fuel first. Thus, we expect that the full implementation of B50 will be in 2027E.

Fig. 11: Biodiesel price versus diesel fuel price trend

As illustrated in Fig. 12, Indonesia’s biodiesel expansion has significantly driven up global demand, which has also pushed up prices. The implementation of B50 in 2H26 is likely to further push up CPO prices as CPO inventory will erode faster than before. We also see a very low likelihood of the biodiesel program being revoked, as the government wants to eliminate diesel fuel imports, and hence, expanding the biodiesel program beyond B50 becomes more feasible.

Fig. 12: Indonesia biodiesel expansion drives up global demand

Tracking Indonesia’s domestic CPO price trend, we note the average price hovers at IDR15,900/kg YTD 2026 (vs. IDR14,100/kg in 2025). The domestic price trend generally moves in tandem with the international price despite some time lag. We think that monitoring domestic price movement is more relevant for TAPG, DSNG, and LSIP, since they are only selling CPO domestically. Given current high CPO prices, domestic CPO firms should enjoy margin expansion. 

Fig. 13: Domestic CPO price trend (IDR/kg)

In 2025, lower exports resulted in higher CPO inventory levels in Malaysia. By 2027F, we expect inventory levels to decline owing to increased domestic consumption as the government plans to expand the national biodiesel blending program to B15 or even B20. In terms of production, we believe the older age profile of trees will lead to lower production yields. In addition, a lower CPO inventory level should support international CPO prices.

Fig. 14: Malaysia CPO inventory levels

We expect vegetable oil prices to remain elevated over the next three years as smallholder farmers might curtail the use of fertilizers amid soaring prices, with supply chains likely to remain disrupted due to the Middle East conflict at least for a year. Potential adverse impact on production yields due to lesser fertilizer use could be seen one or two years later, in our view. Meanwhile, globally, an increasing number of countries, including Indonesia, Malaysia, the Philippines, Thailand, Brazil and the USA, are likely to ramp up biodiesel production in order to reduce their dependency on crude oil. Hence, demand for vegetable oils should structurally exceed supply going forward, even after the end of the war in the Middle East, in our view.

Fig. 15: Price trends for key vegetable oils vs Brent (USD/ton)

Fig. 16: Urea and ammonia spot prices (USD/ton)

Fig. 17: Biodiesel blending mandate in some countries

Fig. 18: US biodiesel production trend (bn tons)

Meanwhile, we expect prices of crude palm kernel (CPKO) to expand at a higher rate than CPO prices due to a more inelastic demand backdrop. CPKO is lauric oil which is usually used in the food industry and oleochemicals. We think the higher prices of coconut oil (due to higher China demand) and cocoa (due to harvest failures in Africa) have driven CPKO prices higher in the past two years as CPKO is considered a near-perfect substitute for these commodities.

Fig. 19: Crude palm kernel oil (CPKO) price is trending upward (USD/ton)

El Nino is one of the biggest concerns we hear from investors. In our view, the dry-weather stress is supportive of CPO prices, as it tightens the regional supply outlook. We also consider the timing to be relevant; prices tend to respond to supply concerns fairly quickly, while the actual yield impact feeds through to FFB with a 6-12 month lag, which we expect to show up in 2027F rather than this year. This leaves 2H26F as a period of firmer prices alongside still-resilient volumes. Unlike 2015, when Indonesian output fell sharply, we do not see higher prices being fully offset by volumes in the near term,

Fig. 20: Oceanic Nino Index (ONI, 1950-2026) – Cold and warm episodes

Lastly, since there are lots of questions concerning the impact of higher fertilizer prices and levy costs on CPO companies, we emphasize that both costs can usually be mitigated by CPO price hikes. This trend can be observed in CPO firms’ operating cash flows and EBIT margins over the past decade – every time there was a substantial adjustment in levy prices during 2019-25 or a spike in fertilizer prices during 2021-22, CPO firms’ EBIT margins remained stable or even kept expanding as well as operating cash flows, given rising CPO price levels. When there is a fertilizer price hike, the market tends to expect a potential production yield erosion in the future, which drives up CPO price first. The same holds true for higher levy costs, which are usually triggered by biodiesel blending expansion, and CPO prices move up first. All in all, disruptions in fertilizer prices, biodiesel expansion + levy hike, and El Nino trend are likely to have a positive impact on CPO price movements as well as benefit CPO firms’ earnings.

Fig. 21: CPO firms’ operating cash flow trend (IDRbn)

Fig. 22: CPO firms’ EBIT margin trend