Analysis: Indonesia Forest Moratorium To Stymie Palm Oil Firms
Author: Janeman Latul and Neil Chatterjee
Indonesia's plans to halt forest clearing will slow the aggressive expansion of plantation firms in the world's top palm oil producer, leading to higher costs as firms will need 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 to 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 rate has sparked concern among environmentalists.
Analysts said firms with a lack of land reserves such as Jakarta's biggest listed planter PT 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 plans to grow landbank will be limited, and firms with small landbanks will find it especially hard to expand," said Kenny Suyatman, fund manager at PT Mandiri Manejemen Investasi.
The fund manages $1.9 billion in assets including stakes in London Sumatra and Sampoerna Agro.
Firms with the smallest unplanted landbanks include BW Plantations and Bakrie Sumatra, while Wilmar and Indofood Agri have the biggest Indonesian landbank.
The ban by Southeast Asia's biggest economy 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 PT SMART Tbk and agribusiness giant Cargill is conducting a review following reports from Greenpeace alleging SMART destroyed carbon-rich rainforests.
Regional planters rapidly expanded in recent years as a rally in crude palm oil prices (CPO) was driven by growing demand from Asia and Europe for an oil used to make products 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 beginning. Sources told Reuters on Wednesday that Wilmar plans to buy a 20 percent stake in Indonesian firm Kencana Agri, which also has a relatively high unplanted landbank.
Gozco, which has among the largest land reserves among small caps, said that firms from Europe, Singapore, India, China plus U.S. agribusiness giant Cargill had expressed interest in taking a stake or partnering it.
The moratorium is creating a perception of land scarcity in Indonesia, said an industry source that does 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, who declined to be identified. "The moratorium, if put in place, will see land prices rise by 30-50 percent from current levels."
ACQUISITIONS OR RESEARCH
This is not good for Astra Agro, whose trees are aging -- at an average of 15 years old versus an optimum fruit-bearing age of 7-18 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 forest moratorium, with output flat this year.
Its stock has slipped 10 percent this year, underperforming a 19 percent rally in the Jakarta index, 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 said. It is now looking at expanding in neighboring Papua New Guinea instead.
If environmental concerns do restrict future supply of palm oil, investors say higher CPO prices could be a comfort for strong players, given a healthy demand outlook. Analysts in a Reuters poll saw steady CPO prices next year.
Those firms able to tap that demand through better yields may be winners.
Alfi Fadhliyah, a plantation analyst at PT 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 told Reuters the moratorium will be a "temporary shock" for the industry, 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.
(Additional reporting by Niluksi Koswanage; Editing by Anshuman Daga)