Highlights

The Indonesian lawmakers are looking to restrict foreign ownership of plantations to no more than 30% (from a maximum of 95% currently), in an attempt to maximize land usage, protect indigenous people and tighten environment control in the sector.

Parliament and government will still need to discuss the draft bill further, and a discussion about the bill is expected before the new Indonesian government is inaugurated in Oct 2014.

According to Reuters (which has seen a copy of the draft), firms would be given 5 years to comply with the new bill, and those that refused to comply may face fines, temporary suspensions or the revocation of permits.

In 2013, the Indonesian government introduced a regulation to restrict to 100,000 ha of plantation area of new private palm firms.

Our View

While it may be premature to judge the impact, the latest development is negative to the plantation sector, especially when the draft bill eventually becomes a law. This is mainly because the draft bill (if it materializes) curbs growth potential of the existing foreign plantation players (via future acquisitions of land bank and reducing existing stakes).

We note that most plantation players under our coverage own land in Indonesia, and Indonesia has always been regarded as plantation players’ immediate target when it comes to land bank expansion.

Catalysts

• Earlier-than-expected recovery in the world’s major economies, resulting in higher edible oil demand and prices;
• Timely implementation of higher biodiesel mandate in Indonesia and Malaysia.
• Weather uncertainties revisit, which would result in supply distortion, hence boosting prices of edible oil.

Risks

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO.
• India imposes higher import duty on CPO.

Rating

NEUTRAL

Positive – (1) Improved demand outlook; and (2) Better production cost visibility.

Negatives – (1) Price attractive of CPO diminishes; and (2) Pricey valuations for the sector.

Top picks

For exposure in the sector, our top pick is Genting Plant (BUY; TP: RM12.16).

Source:Hong Leong Investment Bank Research - 18 Aug 2014