Ban Will Squeeze Palm Oil Producers’ Growth Plans
Janeman Latul & Neil Chatterjee
Indonesia. Indonesia’s plans to halt forest clearing will slow the aggressive expansion of plantations in the world’s top palm oil producer, leading to higher costs as firms look to acquisitions or improved yields to boost growth.
The two-year moratorium on new permits to clear natural forest from 2011 will increase land prices, pushing some to consider following industry leader Wilmar in expanding overseas to Africa or diversify into food crops.
Indonesia is regarded as a key player in the fight to slow climate change because its tropical forests and carbon-rich peatlands trap huge amounts of carbon dioxide. But its rapid deforestation has sparked concern among environmentalists.
Analysts say firms with a lack of land reserves such as Jakarta’s biggest listed planter, Astra Agro Lestari, risk slower profit growth and reduced market share, while smaller players such as Gozco Plantation may be forced to merge or become takeover targets.
“In the short term, the moratorium will be bad for plantation firms as it will limit their land acquisition plans and those with small landbanks will find it especially hard to expand,” said Kenny Suyatman, fund manager at Mandiri Manejemen Investasi.
Firms with the smallest unplanted landbanks include BW Plantations and Bakrie Sumatra, while Wilmar and Indofood Agri have the biggest Indonesian landbank.
The ban follows a $1 billion climate aid deal Indonesia signed with Norway aimed at avoiding greenhouse emissions from deforestation.
Palm oil buyers Unilever and Nestle have halted supply contracts with Indonesian palm oil giant Smart Tbk and agribusiness giant Cargill is conducting a review following Greenpeace allegations that Smart was destroying rainforests.
Regional planters rapidly expanded as a rally in crude palm oil prices was driven by growing demand from Asian and European producers of products ranging from biscuits to biodiesel.
But easy land expansion may be over.
“NGO pressures may become too intense for big cap planters to expand through new planting.
The big cap planters may prefer to buy existing estates or firms,” said Ivy Ng Lee Fang, a plantation analyst at CIMB Investment Bank Berhad in Kualu Lumpur, pointing to BW and Sampoerna Agro as possible targets.
Consolidation in the industry may be starting. Wilmar is believed to be planning to buy a 20 percent stake in Kencana Agri, which also has a relatively high unplanted landbank.
Gozco, which has among the largest land reserves among small caps, said firms from Europe, Singapore, India and China, plus Cargill, had expressed interest in taking a stake or partnering it.
The moratorium was creating a perception of land scarcity in Indonesia, said an industry source who arranges land acquisition deals for Southeast Asian planters.
“Planters are talking to us about either expanding west to Africa or going east to Papua New Guinea,” said the source. “The moratorium will see land prices rise 30-50 percent.”
This is not good for Astra Agro, whose trees are ageing — they are an average of 15 years old, versus an optimum fruit-bearing age of 7 to 18 years — meaning it needs to plant soon. Suyatman sees it losing out from the moratorium and has cut his holding.
Astra Agro expects its expansion to be restricted by the moratorium, with output flat this year.
Its stock has slipped 10 percent this year, and with a price-to-earnings ratio of 19.4 is still seen as overvalued by many.
Land surveys that used to take a few days now take weeks, leading to higher fees, given more stringent environmental criteria. The firm is now looking at expanding in Papua New Guinea instead.
If environmental concerns do restrict future supply of palm oil, investors say higher crude prices could be a comfort for strong players, given a healthy demand outlook.
Those firms able to tap that demand through better yields may be winners.
Alfi Fadhliyah, a plantation analyst at Bahana Securities, picked out London Sumatra and Sampoerna Agro because of high quality seeds as a result of research and a young tree age — a combination that should boost future yields.
London Sumatra, whose CEO believes the moratorium will be a “temporary shock”, has an average tree age of 11 years.
“We like London Sumatra because it could have higher yields among its peers as its trees are at a prime age for palm oil, which could help the company benefit during the moratorium period,” said Winston Sual, fund manager at the $108 million top performing Indonesian fund Panin Dana Maxima.