Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on August 30, 2021 - September 5, 2021

UNITED Malacca Bhd’s strategy to diversify away from palm oil by venturing into the cultivation of coconut, coffee and stevia in Sulawesi seems to have backfired as it writes off slightly over half of the value of its investment in a joint venture (JV) there a year after a stop-work order was issued.

In UMB’s FY2021 annual ­report released last Thursday, it was disclosed that as at April 30, 2021, the group was left with a carrying amount of RM12.6 million on the Sulawesi investment after taking into account the impairment of RM16 million and accumulated amortisation of RM1.45 million.

Without the impairment, UMB would have registered pre-tax profit of RM40.4 million for its financial year ended April 30, 2021 (FY2021) instead of RM24.4 million.

UMB explained in its annual report that the impairment was made as work in Sulawesi was temporarily halted due to environmental concerns raised by non-governmental organisations (NGOs) and the need to furnish a high conservation value/high carbon stock (HCV/HCS) study for the licenced area.

“Due to the Covid-19 pandemic, the group cannot state with certainty the time frame needed to undertake and complete the HCV/HCS study. This indicates that the carrying amount in the subsidiary may be impaired,” it added.

Location of UMB’s Sulawesi concession

Recall that UMB’s investment in Sulawesi was via the acquisition of an effective 60% interest in PT Wana Rindang Lestari (WRL) via the purchase of 425,001 shares, or the entire equity interest in Clifton Cove Pte Ltd, for US$7.2 million (RM30.3 million) three years ago. WRL holds concession rights to develop about 59,920ha of land in Central Sulawesi, Indonesia.

The acquisition was part of UMB’s strategy to diversify away from its reliance on a single commodity — palm oil. It had planned to plant cash crops such as stevia, coconut, cocoa and coffee in Sulawesi to widen its earnings base.

When UMB first announced the acquisition in 2017, it said that WRL had obtained the “Izin Usaha Pemanfaatan Hasil Hutan Kayu Pada Hutan Tanaman Industri” or HTI Licence to develop about 40,000ha of the land.

“Around 40,132ha of the land are plantable while the balance 19,788ha are not. The land comprises six blocks of secondary forest land that are located nearby but not contiguous. Majority part of the land appears to be hilly in terrain,” the announcement read.

However, on Sept 25 last year, UMB announced that WRL had temporarily stopped work due to environmental issues raised by NGOs, adding that it had conducted an assessment of the soil and terrain and an environmental assessment report had been completed and approved by the authorities. Nevertheless, UMB said it would engage with its JV partner PT Sinar Kemilau Cemerlang to discuss the next course of action.

A few days later, UMB said it had issued a stop-work order — specifically land clearing — to facilitate a HCV/HCS study conducted by accredited assessors. It said that the NGOs had focused on the requirement for such a study even though UMB had obtained approvals from local authorities and an environmental impact assessment (Amdal) had been carried out.

UMB added that the HCV/HCS study would take time, but due to the Covid-19 pandemic, it was unable to say how long.

When asked for an update on this prior to the release of UMB’s annual report, the group’s spokesperson tells The Edge via email that a desktop study has been conducted and completed. A desktop study is a prerequisite for a HCV/HCS study. However, due to movement restrictions, the comprehensive HCV/HCS study has not begun.

UMB had stated early this year that the study would help management decide on its next course of action for the concession.

Risk of losing access to NDPE supply chains

Although the plan is to plant cash crops at the Sulawesi concession, the fly in the ointment for UMB is the fact that the palm oil produced from its estates in Malaysia and Indonesia feed into the supply chain of several buyers that have made NDPE (no deforestation, no peat, no exploitation) commitments or are major producers of everyday household products, according to Chain Reaction Research (CRR).

According to its report on Sept 28, 2020, CRR said the stop-work order came about after several parties engaged with UMB about the project in Sulawesi.

“UMB is expected to follow the requirements of industry NDPE policies, including conducting a HCS assessment, to determine how much of the concession is suitable for development,” the sustainability risk assessment group wrote, noting that proceeding without it could lead to HCS land being developed and UMB losing access to NDPE supply chains.

It is worth noting that UMB made a commitment to the NDPE framework in April this year. It is not a member of the Roundtable on Sustainable Palm Oil but its estates and mills in Malaysia and Indonesia have been certified under the Malaysian Sustainable Palm Oil and Indonesian Sustainable Palm Oil certification schemes.

On the point that WRL is not meant to be planted with oil palm trees, so why is it closely scrutinised by the NGOs, CRR wrote that while NDPE policies have typically applied only to deforestation for oil palm, “an increasing number of stakeholders” believe they “ought to be applied across all commodities and to any policy violation”, not just for violations for the development of oil palm.

CRR also pointed out that the concession is located in an area of high biodiversity, next to the 209,000ha Morowali Nature Reserve. It added that its analysis of government soil maps indicated that about a quarter of the concession is located on ultrabasic or ultramafic bedrock that is toxic to plants due to high levels of metals. “This dynamic explains the presence of nickel and bauxite mining in this part of Sulawesi, and ultimately means that significant parts of the plantation are unsuitable for agriculture and forestry,” it said.

When asked if UMB had been aware of the issues raised by the NGOs prior to its decision to invest in WRL, the spokesperson points out that they emerged after the investment was made. Besides, WRL had completed the Amdal before UMB took over.

What could UMB’s next course of action be if the HCV/HCS study — when it is done — eventually turns out to be negative for the group? Industry observers say, where assessed areas are not plantable, plantation companies that own them would typically sell them off.

On what UMB’s plans are for the concession, the spokesperson says, “We will plant up the available area in Sulawesi for planting while exploring and discussing options with the JV partner. The JV partner is aware of the concerns raised by the NGOs and supported UMB’s decision to impose the stop-work order.”

Prior to the stop-work order, a total of 130ha had been cleared. “We will plant up those areas that have been cleared. We can only ascertain more plantable area after the comprehensive HCV/HCS study is carried out,” the spokesperson says, adding that UMB is still committed to diversifying to other crops progressively on existing land.

In UMB’s FY2020 annual report, it is stated that infrastructure work has been completed and a coconut nursery has been established.

According to CRR, UMB’s JV partner in WRL is the Salim Group’s Anthoni Salim or Liem Hong Sien and his son Axton with 30%, and Indonesian businessman Pieter Tanuri and his wife Veronica Colondam with 10%. Their interests are held through a series of subsidiaries.

This is not the first time UMB has come across hurdles in its expansion plans. In Kalimantan, development by its unit PT Lifere Agro Kapuas (LAK) came under scrutiny amid claims that it had cleared peat areas. This was denied by UMB but it had also imposed a one-year moratorium on land clearing at LAK since Jan 10, 2021, while a HCV/HCS study was being done.

Over the past few months, there have been changes in UMB’s management and board, notably the retirement of CEO Peter Benjamin on June 30 and the appointment of Han Kee Juan as a non-executive director on June 3. Han is the plantation adviser for Prosper Group and Far East Holdings Bhd. Meanwhile, Benjamin has been replaced by Young Lee Chern.

Buoyed by strong crude palm oil (CPO) prices, UMB’s share price has risen 2.97% to close at RM5.15 last Thursday, valuing the group at RM1.08 billion.

On its outlook for CPO prices, the spokesperson says UMB believes demand will remain stable in the second half of 2021 but prices could taper down in the final quarter of the year due to improved supply. It expects CPO prices to average from RM3,500 to RM3,800 per tonne in the second half of this year.

The group, which is in its 111th year of operations and has a land bank of 48,554ha in Malaysia and Indonesia, was founded by Tun Tan Cheng Lock. His granddaughter Datin Paduka Tan Siok Choo, who has a 5.8% interest, has been UMB’s chairman since July 2011.

UMB’s top three largest shareholders as at July 30, 2021, were Overseas-Chinese Banking Corporation Ltd with 14.10%, Prosper Palm Oil Mill Sdn Bhd (11.69%) and The Hongkong and Shanghai Corporation Ltd (8.46%).

 

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