Indonesian move may sentiment on plantation stocks

PETALING JAYA: Investor sentiment towards the plantation sector may be hit in the near term, in a knee-jerk reaction to news of a possible cap on foreign ownership of plantation land in Indonesia, Kenanga Research said.
On Friday, news of a possible 30% cap on foreign ownership of plantation land in Indonesia being discussed, broke.
Kenanga Research opines that Kuala Lumpur Kepong Bhd (KLK) is likely to be the most affected, among the big caps, if such a bill is passed.
"In the worst-case scenario, KLK would be the most affected among big cap planters as it has the highest exposure with 53% Indonesian footprint of total planted landbank. This is followed by Sime Darby Bhd at 38%. IOI Corp Bhd's exposure is limited to 7% while Felda Global Ventures (FGV) is only at 4%," Kenanga Research analyst Alan Lim said in a sector update yesterday.
Most plantation stock prices fell yesterday, dragging the plantation index down 0.69% to close at 8,808.32 points.
KLK closed 0.77% or 18 sen lower at RM23.12 with 990,500 shares traded, while Sime Darby closed 2 sen or 0.21% lower at RM9.51, with 3.67 million shares traded. IOI Corp dropped 2 sen or 0.40% lower to RM4.99 while FGV plunged 7 sen or 1.76% to RM3.91.
Lim expects the impact of such a ruling on the PPB Group Bhd to be minimal as its exposure is indirect, through its 18% interest in Wilmar International Ltd.
Amongst the mid caps, Kenanga Research believes CB Industrial Product Holding Bhd (CBIP), TSH Resources Bhd, IJM Plantations Bhd and Genting Plantations Bhd will be among those affected.
All of CBIP's planted landbank are in Indonesia. Its oil palm however are all immature.
This is followed by TSH (88%), IJM (54%) and Genting (52%). It said United Malacca Bhd and Ta Ann Holdings Bhd are not affected as both have no exposure to Indonesia landbank.
"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, if 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," Lim said.
The research house maintains its neutral call on the plantation sector with an unchanged crude palm oil prices estimate of RM2,500 per MT for both 2014 and 2015.
"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."
Meanwhile, RHB Research Institute analysts Alvin Tai and Hoe Lee Leng doubts that such a counter-productive law will become a reality, noting that the country has just had a change of government. The previous government has also introduced measures with a nationalistic slant. It would also be difficult to implement retrospectively, given the large number of companies that may be affected and the need to find buyers to take up those assets.
"Nevertheless, if implemented, we believe it would be negative for the sector's long-term growth and could weaken the Indonesia rupiah further. Malaysian companies which own plantations in Indonesia are most likely the biggest losers, especially those already getting significant earnings contributions from their Indonesian operations, such as Sime Darby, KLK and TSH."
RHB said least-impacted Malaysian companies are like Sarawak Oil Palms Bhd and FGV, which have no Indonesian plantations. IOI Corp, TH Plantations and TDM Bhd have very small planted areas there. Although half of their planted areas are in Indonesia, both Genting Plantations and IJM Plantations' earnings contributions from their Indonesian operations are minimal currently.
"Nevertheless, there could be write-downs on these companies' Indonesian investments in the event they are to pare down their stakes at a loss," it said, adding that it maintains its overweight call on the sector.
HLIB Research viewed that while it may be premature to judge the impact, the latest development is negative on the plantation sector. This is mainly because the draft bill (if it materialises) 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," said its analyst Chye Wen Fei.
HLIB has a neutral call on the sector.