Plantation sector
Upgrade to neutral: Sime Darby Bhd (before the spin-off exercise in December 2017) or Sime Darby Plantation Bhd’s (SDP) foreign shareholding peaked at 21.15% in July 2012 and it has been sliding ever since. In the past seven years, IOI  Corp Bhd’s foreign shareholding peaked at 14.8% in May 2016. After that, IOI’s foreign shareholding has been falling. Recall that IOI’s Roundtable on Sustainable Palm Oil (RSPO) membership was suspended in March 2016. The suspension was only lifted in early August 2016.

In contrast, Kuala Lumpur Kepong Bhd’s (KLK) foreign shareholding climbed back to 18.2% in December 2018. This was close to the peak of 19.2% in April 2012.  

KLK’s foreign shareholding started easing after reaching a high of 18.2% in December 2018. Incidentally, crude palm oil (CPO) prices recorded a brief recovery in the first two months of 2019 after plunging in November and December 2018.

We attribute the fall in foreign shareholding in Malaysia’s plantation sector to a few reasons. First, country-specific reasons as reflected in the decline in the foreign shareholding of Malaysian stocks from 28.6% in March 2018 to 18.5% in September 2019 (as per Bursa Malaysia data).

Second, CPO prices have been languishing since January 2017. Since reaching a monthly average CPO price of RM3,268 per tonne in January 2017, CPO prices have been in the doldrums.

Third, price earnings (PE) valuations of Singapore and Indonesia-listed planters are cheaper than Malaysia’s. Based on the latest Bloomberg consensus estimates and share prices, average 2020F PE are 11.9 times for Singapore-listed planters and 16.7 times for Indonesia-listed companies. In contrast, average 2020F PE of Malaysian planters is 25.4 times (ex-FGV Holdings Bhd and IJM Plantations Bhd).

Although foreign shareholding of the Malaysian planters has been declining, PE multiples of the companies remain high at more than 25 times. The plantation sector in Malaysia was not derated. There was domestic support for Malaysian plantation companies.

Due to the growing prevalence and importance of environmental, social and governance (ESG), we think that there is risk that foreign shareholding of plantation companies may continue to fall.

Although Malaysian planters are RSPO members and do not practise unsustainable planting and estate management policies, the recent haze and forest fire incidents in Indonesia have cast the industry in a negative light.

Despite the haze incidents in 2013 and 2015, foreign shareholding of the three plantation companies were not affected. However since 2014 and 2015, scrutiny by international environmental organisations have intensified. Also, the European Union has started proposing barriers on palm biodiesel.

Although there is local buying support, we are unsure if this would be enough to push up the share prices of Malaysian planters if CPO prices rebound. Without foreign participation, this would be difficult. There is risk that foreign shareholders may not return due to ESG reasons. — AmInvestment Bank, Oct 8