New Indonesia land law raises fresh risks for Malaysian planters

KUALA LUMPUR: Malaysian plantation companies with substantial operations in Indonesia could face increased regulatory uncertainty following the passage of Indonesia's new Agrarian Reform Law, according to Public Investment Bank (PublicInvest) Bhd.

Its analyst, Chong Hoe Leong, said the legislation could present another challenge for Malaysian planters after a year marked by land seizures and hefty fines in Indonesia.

However, the potential impact on plantation companies remains unclear as key implementing regulations have yet to be finalised.

"The potential impact of the new law remains unclear pending regulations that will set landholding limits, establish conflict-resolution mechanisms and define the specific powers of a new agency that will oversee land reform," he said in a note.

Indonesia's House of Representatives approved the Agrarian Reform Law on Sept 22, with the legislation aimed at addressing land ownership and control, redistributing land and strengthening mechanisms for resolving agrarian conflicts.

It also provides for the establishment of a dedicated national body to oversee agrarian reform.

Chong said the new framework could create additional regulatory risks for Malaysian plantation groups such as SD Guthrie Bhd, Kuala Lumpur Kepong Bhd (KLK) and Genting Plantations Bhd, which have significant exposure to Indonesia.

A key provision requires holders of cultivation rights, known as Hak Guna Usaha (HGU) and plantation permits, to provide at least 20 per cent of their land for agrarian reform and redistribution or fulfil the requirement through an equivalent profit-sharing arrangement.

The law also introduces provisions to regulate landholding limits, although the specific thresholds and implementation details are still to be determined through subsequent regulations.

Chong said Public Investment Bank was not changing its call on the plantation sector, as it believed the heightened regulatory risk was unlikely to translate into earnings or asset losses in the near term.

He said the recent pullback in palm oil stocks presented an attractive entry opportunity, supported by expectations of stronger earnings in the second half of the year and firmer crude palm oil (CPO) prices during the high production season.

The bank maintained its "Overweight" rating on the plantation sector and its full-year CPO price forecast at RM4,500 per tonne.

Within the sector, Chong said the firm preferred Sarawak Plantation Bhd and Ta Ann Holdings Bhd, citing their above-industry production growth, attractive dividend yields of seven to eight per cent and zero exposure to Indonesia.