The recent news from Jakarta Post mentioned that the plantation bill which sets stricter rules on foreign ownership in the plantation sector has been passed. However, the limitation does not specify the percentage value but allows the central government to set it based on type of crop, the size of the producing company and certain geographical conditions. Effectively, this means that the new government under President Jokowi (to be sworn in on 20 Oct) will have the power to set the limit. Hence, we believe that Malaysian planters are likely to take a “wait and see” attitude to understand Jokowi policy on the matter before committing to more planting activities in Indonesia. To be conservative, we have incorporated such risk in our valuation for planters with significant exposure to Indonesian plantations by assuming lower Fwd. PE valuation in our recent sector report on 18-Aug-2014. Maintain NEUTRAL on the sector with CPO prices assumption of RM2500/MT unchanged for CY14 and CY15. Our only OUTPERFORM is SIME (TP: RM10.10) due to potential spin-off for its non-plantation divisions. Maintain MARKET PERFORM on IOICORP (TP: RM5.30), KLK (TP: RM23.80), FGV (TP: RM4.00), PPB (TP: RM15.00), TSH (RM3.40), TAANN (TP: RM4.50), UMCCA (TP: RM7.15) and CBIP (RM4.85). Maintain UNDERPERFORM on GENP (TP: RM9.55) and IJMP (RM3.50).

Foreign ownership limit is passed through although no specific percentage mentioned. The Jakarta Post reported that “The House of Representatives on Monday passed the plantation bill, which sets stricter rules on foreign ownership in the plantation sector so as to prioritize smaller local investors. The limitation is to have no specific percentage value, although the House’s Commission IV has previously demanded a 30% foreign ownership cap. Instead, the law allows the central government to limit direct foreign investment in Indonesia’s growing plantation sector”.

Neutral on the news. On the positive side, the 30% foreign ownership cap is absence from the law that was passed. However, the central government now has the power to set the limit on foreign ownership on a case by case basis. This will be subject to the type of crop, the size of the producing company and certain geographical conditions. Effectively, this means that the new government under President Jokowi (to be sworn in on 20 Oct) will have the power to set the limit. Hence, we believe that Malaysian planters are likely to take a “wait and see” attitude to understand Jokowi policy on the matter before committing to higher planting in Indonesia. To be conservative, we have incorporated such risk in our valuation on planters with significant exposure to Indonesian plantations by assuming lower Fwd. PE valuation in our recent sector report on 18-Aug-2014.

Sector call unchanged at NEUTRAL. We are keeping our NEUTRAL call as we think that the news is unlikely to affect CPO prices in the near term. We also maintain our average CPO prices of RM2500/MT unchanged for CY14 and CY15. Generally, upside for planters are limited as we think 3Q14 result is likely to be lower YoY due to low CPO prices. However, downside is also limited due to ample liquidity seen in the local market and overall flattish share price performance YTD.

SIME (TP: RM10.10) is our top pick. We like SIME as we think its valuation should rerate higher due to potential spin off exercise within SIME business divisions. As it is, it has been reported by media quoting Tan Sri Mohd Bakke Salleh (SIME’s CEO) specifying that the listing of its motor unit is set to be executed in 1HCY15 subject to market conditions. The stock is also cum dividend of 30.0 sen (subject to approval in the AGM).

Source: Kenanga