Malaysia’s largest plantation state, Sabah, which accounts for about 29.6% of Malaysia’s total plantation area, has recently been hit by armed intruders in Lahad Datu and Semporna, which are in the east coast. We have spoken to KL Kepong, Sime Darby and Felda Global Ventures to get clarity on the situation, resulting in a slightly longer time in addressing the situation in a note as we are doing now. In essence, the companies have indicated to us that there are no significant impacts on plantation activities at this juncture. Nonetheless, we do not rule out the possibility of financial losses or a slowdown in operations in the event the crisis is dragged on longer or if tensions are ratcheted up a notch or two.

All started since Feb 12. To recap, the “Royal Army” of Jamalul Kiram III, who is the current sultan of Sulu, a territory, which historically included northern Borneo and the islands in the Sulu Sea between Borneo and the Philippines’ southern island of Mindanao, invaded Sabah by boat from Philippines on Feb 12. A total of 8 Malaysian police personnel were killed in a series of exchanges in the beginning. Since then, Malaysia has deployed overwhelming military might, including air force strike attacks and the fielding of seven army divisions to root out the raiders. At least 53 members of Kiram’s army have been killed while more than 79 people have been detained to-date for having links with the armed group. The Malaysian government has rejected a unilateral ceasefire offer from the invaders’ leader unless the militants surrender unconditionally.

Latest moves. Malaysian security forces have cordoned off all sea and land routes to Lahad Datu town to prevent food and weapon supplies from reaching the armed intruders from the Southern Philippines.

Business as usual quoted by plantation companies. There are total of 13 listed plantation companies having exposure in Sabah, of which 7 have their plantation land located within the Lahad Datu region, which is the conflict zone. The companies claim there is no disruption to-date in their respective business operations despite a series of speculations from various sources. Meanwhile, the Ministry of Plantation Industries and Commodities also commented that the impact of the affected area is too minimal to justify given that most refineries are located in town areas while the conflict is isolated to the rural areas.

Prolonged crisis will not be good for all. Though we are not expecting any earnings impact for now, we think the prolonged crisis will not be good for the longer term as it will dampen business confidence and slow down business operations of the companies.

Source: PublicInvest Research - 11 Mar 2013