Plantation sector
Maintain “neutral”.  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 prioritise smaller local investors.

“The limitation does not specify the 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.”

On the positive side, the 30% foreign ownership cap is absent 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 Joko Widodo, or Jokowi, who is to be sworn in on Oct 20 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’s policy on the matter before committing to higher planting in Indonesia.

To be conservative, we have incorporated such risks in our valuation on planters with significant exposure to Indonesian plantations by assuming lower forward price-to-earnings ratio valuation in our recent sector report on Aug 18, 2014.

We are keeping our “neutral” call as we think that the news is unlikely to affect crude palm oil (CPO) prices in the near term. We also maintaining our average CPO prices of RM2,500 per tonne unchanged for the calendar year 2014 (CY14) and CY15.

Generally, the upside for planters is limited as we think the third quarter of 2014 (3Q14) result is likely to be lower year-on-year ( y-o-y) due to low CPO prices.

However, the downside is also limited due to ample liquidity seen in the local market and overall flattish share price performance year-to-date.

Our only “outperform” is Sime Darby Bhd with a target price (TP) of RM10.10 due to potential spin-off for its non-plantation divisions. Maintain market perform on IOI Corp Bhd with TP of RM5.30, Kuala Lumpur Kepong Bhd at RM23.80, Felda Global Ventures Holdings Bhd or FGV at RM4, PPB Group Bhd at RM15, TSH Resources Bhd at RM3.40, Ta Ann Holdings Bhd at RM4.50, United Malacca Bhd at RM7.15 and CB Industrial Product Holding Bhd at RM4.85.

We maintained “underperform” on Genting Plantations Bhd with a TP of RM9.55 and IJM Plantations Bhd at RM3.50. — Kenanga IB Research, Oct 1
 

This article first appeared in The Edge Financial Daily, on October 2, 2014.