Regional Plantations - Maybank Kim Eng 2019-09-16: Why Always Me? There Is No Gold Rush Here

Regional Plantations - Maybank Kim Eng Research | SGinvestors.io FIRST RESOURCES LIMITED (SGX:EB5)

Regional Plantations - Why Always Me? There Is No Gold Rush Here

The convenient victim

  • For years now, this industry has failed to dispel the stigma linked to haze despite having spent millions to improve sustainable practices. Our survey confirms this perception, although respondents believe the poor smallholders in Indonesia do slash-and-burn, but not necessarily for oil palm planting.
  • After all, oil palm’s investment return is lowest in 18 years. Some companies even reported losses in 2Q19. Hence, it is inconceivable this haze is due to oil palm planting. It is simply too hot and dry, and hence the land/trees catch fire easily.

Protracted dry & hot seasons can start wildfires

  • Since the last strong El Nino in 2015, Indonesia instituted several reforms. One example is large growers are made to form their in-house fire-fighting team, invest in equipment, and even respond to fires in the surrounding community lands. Indonesia banned open burning in recent years while Malaysia banned it for over 20 years already. Nonetheless, Sumatra and Kalimantan have large tracts of peat area that is environmentally sensitive and catches fire easily during protracted dry seasons (between June–Sept).
  • Extreme dry seasons such as those in 1997, 2015, and 2019 result in wildfires, be it on peat area, natural forests or agricultural land. As of 15 Sept, even South American and African continents recorded significant hotspots.

The industry still suffers from negative perception

  • Last week, I did a survey among friends, investors and colleagues on whether they believe 2019’s haze was due to slash-and-burn for planting oil palm. The survey shows 72% of 83 respondents believe so. The results were not surprising given the bad publicity the industry received for years.
  • In the survey, some believe smallholders are still slashing and burning but not for oil palm but other cash crops because they provide faster return (unlike oil palm which gives first profit at least 7 years after initial planting).
  • Oil palm trees are perennial crops with productive lifecycle of ~25 years. The oldest oil palm tree in Malaysia is ~100 years. Once planted, it matures in ~3 years and produces fruits all year round. Hence, there is no need to cut and replant oil palm every year unlike other non-perennial crops like sugar cane, padi, vegetables, soybean, tobacco, or oilseeds. And although it is easy to blame smallholders for the environmental damage caused by slash-and-burn deployed in the past, smallholders simply lack the necessary means to do otherwise.

The numbers do not make sense

  • Unlike the golden years of 2008-12, the industry’s investment returns are no longer attractive. Taking IOI Corp (HOLD) as a proxy case study (based on availability of data given its long listing history), it recorded its lowest upstream profit in 18 years with an operating profit of MYR2,713/ha (before debt servicing) for FY6/19 on low CPO price and rising cost pressures.
  • The latest 2Q19 results season revealed that the growers had one of their worst quarters in years. Hence, it is inconceivable that smallholders will be keen to plant oil palm. Existing growers, especially smallholders, even cut back on fertilizer use given their tight cash flow.

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-09-16
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