• Bloomberg reported that President Joko Widodo has ordered officials to halt permit issuance for new and expansion of oil palm plantations for three years.

• Also, there will be no new permits for the conversion of forest area into oil palm plantation. Forest areas that have already been planted with oil palm are exempted from the rules.

• This ruling is expected to reduce supply of oil palm in the long-term and help support CPO prices.

• Even without this ruling however, listed plantation companies with operations in Indonesia have already cut down on new plantings of oil palm due to slow approvals for NPP (New Planting Procedure) from RSPO.

• In any case, listed plantation companies do not plant forest or virgin forests with oil palm as this is not allowed by RSPO. We believe that this ruling would affect private plantation companies in Indonesia more than the listed ones.

• More than 10 years ago, the listed plantation companies used to plant about 5,000 to 10,000ha of oil palm each year but in the last five years, new plantings per company have dropped to less than 5,000ha per year.

• For instance, Genting Plantations planted less than 30ha in Indonesia in 1HFY18 pending RSPO approvals. Apart from RSPO issues, TSH Resources have also carried out minimal new plantings to conserve cash.

• IOI Corporation's focus is on re-planting of ageing oil palm plantations in Sabah. Other companies have carried out minimal new plantings as their plantable landbank reserves in Indonesia are small.

• KL Kepong's plantable land reserves in indonesia are about 8,000ha to 10,000ha while IJM Plantations' plantable land reserves are about 3,000ha to 5,000ha. Sime Darby Plantation's plantable land reserves in Indonesia are about 10,000ha.

• In the long-term, this ruling would spur acquisition of plantation companies with landbank, which already has the Hak Guna Usaha land title in Indonesia.

• This would allow plantation companies to continue expanding oil palm plantations in the future. However, progress is still likely to be slow due to intense scrutiny from environmental organisations.

• Maintain Neutral on the plantation sector with BUYs on Genting Plantations (Fair value: RM11.20), IJM Plantations (Fair value: RM3.00), IOI Corporation (Fair value: RM5.05) and TSH Resources (Fair value: RM1.48).

Source: AmInvest Research - 21 Sept 2018