New Indonesian bill a tamed risk for planters

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Maybank Research said potential losers from this update would be foreign investors planning to expand to Indonesia given the lack of clarity.

KUCHING: Analysts held mixed views over Indonesia passing the bill to limit foreign ownership in the plantation sector with no specific ownership limit.

This new law appears to set a basis and legal umbrella for future regulations on foreign ownership in Indonesia’s agricultural sector, analysts at Maybank Investment Bank Bhd (Maybank Research) said.

“The specific limit will be decided separately through government regulation (Peraturan Pemerintah or PP), based on the type of crop, the size of the company, and geographical conditions.

“We note that the issuance of PPs do not need further Parliament approval.”

While the details on the foreign ownership limit is not available, Maybank Research thinks this plantation bill is more reasonable than the earlier proposal as it is not retroactive.

Researchers with TA Securities Holdings Bhd (TA Research) affirmed the good news being that the new bill had refrained from directly imposing a limit to foreign shareholding cap, as what the original draft envisioned.

Instead, it is now up to the central government to decide whether any such cap is necessary.

“We have highlighted in our previous report that the incoming Indonesian President, Jokowi Widodo, is not keen of a law to limit foreign ownership, including retroactively.

“Hence, we think the new government might only impose a far less punishing cap, or just choose not to impose any shareholding cap at all.”

However, TA Research warned that while an immediate threat had been avoided, regulatory risk may not have entirely diminished.

The key factor underpinning the political drive to limit foreign shareholding is deeply rooted in the ‘commodity nationalism’ in the country, which TA Research observed had so far had already impacted the mining sector.

“Our concern is that the new government, or any successive governments, could fall back to the clause in the plantation bill if there is a strong political pressure to do so.

“Another factor to consider is that the new law suggests different level of foreign ownership based on operational sizes or regions and therefore, introduces another lever of difficulty in the way individual company structure diversified operations.

“In addition, while the retroactive enforcement has been exempted for those plantations with licences of rights to cultivate, it remains unclear whether foreign shareholding cap, if any, will not apply retroactively to land bank with a lesser permit.”

Maybank Research said potential losers from this update would be foreign investors planning to expand to Indonesia given the lack of clarity.

New planting, it said, will slow significantly if the foreign ownership limit is set too low as foreign investors want majority control.

On the other hand, merger and acquisition activity outside Indonesia will pick up if there is lack of investment opportunities in Indonesia, and companies with Indonesian operations may be potential targets.

“We also anticipate an increase in numbers of initial public offerings (IPOs) in Indonesia over the medium term to capitalise on this new rule.

“CPO price will gradually strengthen in the coming years as supply growth will slow in Indonesia in the short term if the new rules are too stringent.”

Maybank Research consecutively maintained its neutral call on the sector, with selective buys across the boardeincluding Ta Ann Holdings Bhd, Sarawak Oil Palms Bhd, Boustead Plantations and Sime Darby Bhd.