According to Reuters, Indonesian lawmakers are mulling a bill to restrict foreign ownership of plantations there to no more than 30% (from the current 95%). The report also elaborated that their objective is to open up the sector to smaller Indonesian players while foreigners will be given five years to comply. In our view, Indonesian lawmakers may first consider the impact to foreign investment in their plantation industry before passing the bill. Additionally, we believe that the plantation players in Indonesia are likely to oppose the move as they have invested heavily in the country’s palm oil industry. Nevertheless, in the worst case scenario where the bill is passed into law, it will be negative to most planters under our coverage due to reduced long-term earnings from their plantations there. In the worst case scenario, KLK would be the most affected among big cap planters while mid cap players affected most are CBIP, TSH, IJMP and GENP. Pending the eventual outcome, we maintain our NEUTRAL call with unchanged CPO prices estimate of RM2500/MT for both 2014 and 2015. We are watching the development surrounding this news closely as the new governmental administration for Indonesia should take over from October onwards. In the near term, we believe that sentiment towards plantation sector will likely be hit and it is possible that there will be short term knee-jerk reaction pending further news. If the draft bill is passed into law, we are likely to downgrade both CBIP and TSH to MARKET PERFORM due to their significant exposure to Indonesia plantations.

Foreign ownership of plantations to be restricted to 30% in Indonesia? Reuters reported that Indonesian lawmakers are looking to restrict foreign ownership of plantations to no more than 30% (from the current 95%). In addition, Reuters quoted Gamal Nasir (director general of plantations at the agriculture ministry) saying that Indonesia's parliament is looking to conclude discussions on the draft bill with the government soon and expects it to be approved before the new administration comes in. The report elaborated that the objective of the draft bill is to open up the sector to smaller and local players in Indonesia while firms will be given five years to comply with the new bill.

Negative impact if the bill is passed. We believe that Indonesian lawmakers may consider the impact to foreign investment in their plantation industry before passing the bill. Additionally, we believe that the plantation players in Indonesia are likely to oppose the move as they have invested heavily in the country. Nevertheless, in the worst case scenario where the bill is passed into law, it would be negative to most planters under our coverage due to reduced long-term earnings from their Indonesia plantations.

Worst case scenario, KLK to be affected the most among big cap planters as it has the highest exposure with 53% Indonesian footprint of total planted landbank. This is followed by SIME at 38%. IOICORP’s exposure is limited to 7% while FGV is only at 4%. Impact to PPB is also expected to be minimal as its exposure is indirect through 18% ownership of stake in Wilmar. As for mid caps, we believe CBIP, TSH, IJMP and GENP would be affected. All of CBIP’s planted landbank is in Indonesia, although all of them are still immature. This is followed by TSH (88%), IJMP (54%) and GENP (52%). UMCCA and TAANN are not affected as both have no exposure to Indonesia landbank.

Pending final outcome, our sector call is maintained at NEUTRAL. At this juncture, SIME (OP; TP: RM10.35) remains as our big cap top pick as we think its valuation should rerate higher due to potential spinoff within SIME business divisions. As for TSH (OP; TP: RM4.00), it is still our mid cap top pick due to its superior FFB growth of 18% in FY14E (against peers’ average of 10%). We are watching the development surrounding this news closely as the new administration for Indonesia should take over from October onwards. In the worst case scenario where the draft bill is passed into law, we are likely to downgrade both CBIP and TSH to MARKET PERFORM due to their significant exposure to Indonesia plantations.

Source: Kenanga