Recall that Reuters had on 15-Aug-2014 reported that Indonesian lawmakers are looking to restrict foreign ownership of plantations to no more than 30% (from the current 95%). Subsequently, we gather that the latest news on 22-Aug-2014 which points towards more nationalist policy in Indonesia and the proposed restriction is extended to the insurance industry besides the plantation industry. While we do admit that the possibility of whether these proposals may be passed is still a question mark, we are now taking a view that the intention to limit foreign ownership in Indonesian do exist and would eventually materialize in the long-term. Hence, we believe that it is prudent to incorporate such risk in our valuation on planters with significant exposure to Indonesia by assuming lower Fwd. PE valuation. As a result, we have downgraded both CBIP (New TP: RM4.85; Old TP: RM5.60) and TSH (New TP: RM3.40; Old TP: RM4.00) to MARKET PERFORM (from OUTPERFORM). IJMP (New TP: RM3.50; Old TP: RM3.75) is downgraded to UNDER PERFORM (from MARKET PERFORM). TP has also been reduced for SIME (New TP: RM10.10; Old TP: RM10.35), KLK (New TP: RM23.80; Old TP: RM25.00) and GENP (New TP: RM9.55; Old TP: RM9.70). We maintain our calls and TP for planters with less than 10% exposure namely IOICORP (MP; TP RM5.30), PPB (MP; TP: RM15.00), FGV (MP; TP: RM4.40), TAANN (MP; TP: RM4.50) and UMCCA (MP; TP: RM7.50). Sector call is maintained at NEUTRAL with unchanged CPO prices estimate at RM2500/MT for both 2014 and 2015.

Latest update on Indonesia proposal to limit foreign ownership of plantations. Recall that Reuters had on 15-Aug-2014 reported that Indonesian lawmakers are looking to restrict foreign ownership of plantations to no more than 30% (from the current 95%). Subsequently, we gather from The Edge Malaysia news on 21-Aug-2014 which quoted Datuk Seri Mustapa Mohamed (Malaysia International Trade and Industry Minister) stating that Malaysia respects the Indonesian government’s proposal. Lastly, the latest news from Reuters on 22-Aug-2014 mentioned that Indonesia lawmakers are looking into the possibility of reducing the stakes foreign investors are allowed to hold in local insurers (from 80% currently).

Taking a view that the “intention” to limit foreign ownership in Indonesia plantation should not be ignored. Based on the latest news that we gather, the direction towards more nationalist policy in Indonesia seems to have gathered more attention and it has now been proposed for the insurance industry besides the plantation industry. While we do admit that the possibility of whether these proposals seeing daylight is still a question mark, we are now taking a view that the intention to limit foreign ownership in Indonesian does exist and will eventually materialize in the long-term. However, we believe that the final allowed ownership may not be as low as 30% due to the need the country to continue drawing foreign investments. Hence, we believe that it is prudent to incorporate such risk in our valuation on planters with significant exposure to Indonesia plantations by assuming lower Fwd. PE.

Downgrading CBIP and TSH to MARKET PERFORM; IJMP downgraded to UNDER PERFORM. CBIP is downgraded to MARKET PERFORM with new TP of RM4.85 (previously OUTPERFORM with TP of RM5.60) after assuming lower Fwd. PE of 13x implying +2.4SD valuation (previously 15x on maximum valuation). Note that all of CBIP’s 4,600 ha of planted landbank is in Indonesia but still immature. TSH is downgraded to MARKET PERFORM with new TP of RM3.40 (previously OUTPERFORM with TP of RM4.00) after assuming lower Fwd. PE of 15.4x based on mean valuation (previously 18.0x based on +1.0SD valuation). Note that TSH has 32,755 ha of planted landbank in Indonesia representing 88% the Group’s total landbank. IJMP is downgraded to UNDER PERFORM with new TP of RM3.50 (previously MARKET PERFORM with TP of RM3.75) after assuming lower Fwd. PE of 17.3x based on -0.5SD valuation (previously 18.6x based on Mean valuation). Note that IJMP has 30,046 ha of planted landbank in Indonesia representing 54% the Group’s total landbank. TP for SIME, KLK and GENP reduced. SIME TP is reduced to RM10.10 (previous TP: RM10.35) after assuming lower Fwd. PE on its plantation division of 21.0x (from 22.0x). Despite the lower TP, SIME remains as our big cap top pick as we think its valuation should rerate higher due to potential spin off exercise within SIME business divisions. Meanwhile, KLK’s TP is reduced to RM23.80 (previous TP: RM25.00) while GENP’s TP is reduced to RM9.55 (previous TP: RM9.70).

Maintain recommendation and TP for planters with <10% exposure to Indonesia. These include IOICORP (7% planted landbank exposure), FGV (4%), TAANN (0%) and UMCCA (0%). As for PPB, we maintain its valuation although Wilmar do have exposure to Indonesia plantation as we think that the net impact to PPB’s earnings is small given that Wilmar business is diversified across Asia.

Source: Kenanga