The Director-General of Plantations at the Indonesian Agriculture Ministry told  Reuters  that  the  Indonesian  Parliament  and  government  have approved a plantation bill that aims to maximize land usage and open up the sector to smallholders. Important for Malaysian plantation companies, the earlier proposed 30% limit on foreign ownership (from 95% currently) has  been  dropped.  The  new  bills  however  include  provisions  requiring plantation companies to allocate 20% of their concessions to people who live in the nearby areas and to help them to plant their own plantations. (Source: The Star)

Comments: The omission of the 30% foreign ownership limit is positive but not unexpected following recent press speculations. With regard to the requirement to allocate 20% of concession areas to people living in nearby areas, the impact will depend on existing limits (which may varies from 10% to as high as 50%) in the areas under development. The rule is unlikely to be applied retrospectively to areas already developed. Malaysian plantation companies with significant plantation landbank in Indonesia include SIME, KLK, GENP, IOI, IJMP and FGV.

With the distraction of the Indonesian regulatory risk on foreign ownership temporarily  out  of  the  way,  investors’  prime  focus  will  revert  to  the  CPO price outlook, which remains subdued due to high production of vegetable oils. CPO 3-M futures closed at RM2,217/MT yesterday.

Maintain NEUTRAL rating on the plantation sector.

Source: xxx Research - 1 Oct 2014