Reports


Indonesia’s Palm Oil Landbank Expansion Limited by Proposed Moratorium and NPDE Policies
February 13, 2017
Indonesia’s proposed palm oil moratorium combined with buyers’ No Deforestation, No Peatland, No Exploitation (NDPE) policies impacts industry growth potential. Within current concession areas, the moratorium adds regulatory risks to market access risks for companies that proceed with developing forests or peatland. Outside these existing concession areas, there is a material loophole in the proposed moratorium for land classified as ‘convertible production forest’ (HPK). However, this loophole is essentially closed by stranded land risks caused by NDPE policies. West Kalimantan has 2.2 million ha of land suitable land for palm oil development outside of its current licensed palm oil concessions. But, because of the moratorium and NDPE policies, at most 6 percent of this land is available for future viable oil palm concessions. Likely responses to NDPE market innovations and the moratorium are an increase in smallholder investments, industry consolidation and vertical integration.

Download as PDF: Indonesia’s Palm Oil Landbank Expansion Limited by Proposed Moratorium and NDPE Policies



Indonesian Palm Oil’s Stranded Assets: 10 Million Football Fields of Undevelopable Land
February 9, 2017
6.1 million ha of forests and peatland are “stranded assets” on the balance sheet of Indonesian palm oil companies and cannot viably be developed. This magnitude is potentially unknown to investors and bankers, and analysts may be mispricing these stranded assets into current financial valuations. Stranded land is a type of stranded asset, “assets that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities.” Due to stranded assets, the Indonesian palm oil industry may be facing a trend of lower growth and equity revaluations. Banks may be left with poor loan collateral when the underlying oil palm concession is recognized as stranded land. Risks and costs for companies and credit and equity investors are likely to increase. This means that landbank expansion – regardless of location – is a high-risk financial strategy.

Download as PDF: Indonesian Palm Oil’s Stranded Assets: 10 Million Football Fields of Undevelopable Land



Indofood Sukses Makmur and First Pacific: Financial Risks from Upstream Investments
February 7, 2017
PT Indofood Sukses Makmur Tbk. (Indofood SM), listed on the Indonesia Stock Exchange, is the country’s largest food company. Its largest shareholder is First Pacific Co. Ltd., a Hong Kong-listed conglomerate with interests in food, telecom, construction, and natural resources. Both Indofood SM and First Pacific face financial risks from their upstream investments. These material risks include contested land and labor risks associated with their supply chains and reputation risks from their investments in their Singapore-listed oil palm plantation subsidiary Indofood Agri Resources. A stock price decline of 16 percent could materialize if banks and equity investors with ESG policies avoid Indofood Sukses Makmur because of concerns about deforestation and labor issues at its 74.5 percent controlled subsidiary Indofood Agri. Indofood Agri’s ESG risks could also negatively impact First Pacific’s share price.

Download as PDF: Indofood Sukses Makmur and First Pacific: Financial Risks from Upstream Investments



Indofood Agri Resources: Material Risks from Contested Land and Labor Issues
February 6, 2017
Singapore-listed Indofood Agri Resources (Indofood Agri) is one of the largest oil palm plantation companies in Indonesia. However, 42 percent of the company’s 549,287 ha total landbank is contested. Indofood Agri controls 63 concessions. Of these, six allegedly have community conflicts and labor controversies, and four are located on peat or forest areas and are potentially prohibited from development. Approximately 5,900 ha of peatland burned in 2015 on Indofood Agri’s concessions, and 16 plantation companies — 29 percent of its total landbank — do not publish concession maps. An RSPO complaint was recently filed accusing Indofood Agri of employing child labor and exhibiting poor labor practices, and at least 36 percent of the CPO processed in Indofood Agri’s refineries comes from undisclosed sources. Taken together, these risks could have a 2.5 percent to 20 percent negative impact on Indofood Agri’s share price.

Download as PDF: Indofood Agri Resources: Material Risks from Contested Land and Labor Issues



Banks Finance More Palm Oil Than Investors: Investors Face Indirect Exposure
February 4, 2017
By financing the massive expansion of the palm oil sector, banks are contributing to deforestation, peat development and social conflicts. Analysis of bank financing – both loans and equity and debt underwriting – of 16 major palm oil companies from 2006-2015 shows that banks are more important financiers than equity and debt investors. This means that investors in these banks also are exposed indirectly to sustainability risks. The adoption of no deforestation policies by banks has an impact, but too many banks have not yet adopted such policies.

Download as PDF: Banks Finance More Palm Oil Than Investors: Investors Face Indirect Exposure



2016 Sustainability Benchmark: Indonesian Palm Oil Growers
December 19, 2016
The sustainability policies and recent practices of 10 largest IDX-listed palm oil growers were analyzed and ranked. Together these companies harvest around 10 percent of the world’s oil palm. Climate change, biodiversity loss and human rights abuses were the key elements of screening. The sustainable purchasing policies of main traders/processors have strengthened the sustainability policies and practices of 4 of the 10 largest palm oil growers listed on the Indonesian stock exchange (IDX). Most of the IDX-listed palm oil growers still have poor sustainability standards. The IDX-listed palm oil growing companies PT Tunas Baru Lampung and PT Sawit Sumbermas Sarana are presently clearing forests and/or peatlands. The world’s top food processing companies Nestlé and Unilever are among their customers.

IDX-listed palm oil growers, sustainability scores:

Download as PDF: 2016 Sustainability Benchmark: Indonesian Palm Oil Growers



Sime Darby: Liberian Crossroads
November 1, 2016
Sime Darby (SIME:MK), a Malaysian conglomerate, signed a 63-year concession agreement in 2009 for 220,000 ha of land to be developed into oil palm and rubber plantations in Liberia. An additional 44,000 ha are to be developed under an outgrower scheme. To date, Sime Darby has planted 10,411 ha palm oil and 107 ha rubber. Our analysis found significant changes in Liberian context since 2009. Customary land rights are entrenched in Liberian legislation and efforts to halt deforestation have increased, heightening risks for Sime Darby’s original aggressive expansion plans. Sime Darby’s undeveloped land bank in Liberia contains high-density forest; thus 45% cannot be developed responsibly. This figure is conservative as it is not adjusted for medium-density forest (an additional 34%) or biodiversity hotspots.

Unresolved issues remain six years after community negotiations started. These long processes create the risk of ‘moving targets’ as previously made agreements can be voided by new developments. Full concession development would require negotiations with an additional 55 communities. This could entail decades of negotiations with uncertain outcomes, and could result in significant delays to project development. Respecting a 2km buffer zone around towns reduces the available area by 20%. Finally, Sime Darby’s share price could devaluate due to restrictions on the concession area. Mainstream investors continue to value Sime Darby’s Liberian project assuming full concession development.

Download as PDF: Sime Darby: Liberian Crossroads



Palm Oil Frontiers: Lessons Learned from SE Asian Corporate Expansion to Africa
October 28, 2016
SE Asian corporations – Golden Agri-Resources, Kuala Lumpur Kepong, Sime Darby, Olam International, Wilmar International, and Felda Global Ventures – are seeking to expand their palm oil business in West and Central Africa. Palm oil has been identified as a driver of both tropical deforestation and climate change, and this expansion also often has financial risks due to concerns about negligence of communities’ rights and environmental impacts. At the same time, countries supporting palm oil expansion are often post-conflict, fragile states seeking development and investments, dealing with weak governance and legal systems and lack instruments to stimulate and regulate responsible management practices.

Chain Reaction Research looked at investments in Africa since 2008, and found that they illustrate both systemic and company-specific material financial risks. For example, the experiences of investors and corporations expanding into Liberia illustrate that it is important to absorb lessons from previous SE Asian investments regarding specific social and environmental risks and opportunities.

Download as PDF: Palm Oil Frontiers: Lessons Learned from SE Asian Corporate Expansion to Africa


Noble Group
Noble Group: Cost of capital and deforestation risks under priced? (Revised)
September 2, 2016
Noble Group Ltd. is a supply chain manager headquartered in Hong Kong, involved in the commodity trading of oil, coal, metals and palm oil. Five years ago, Noble group was among the 100 biggest companies in the world by revenue, generating it by purchasing physical commodities, transforming and then trading them. Since then, its shares value have decreased 90%. For the fiscal year 2015 Noble Group posted its first annual loss in twenty years, losing $1.7 billion due to significant reported impairments. These corresponded to allegations of misleading aggressive accounting overvaluing Noble Group’s commodity contracts.

Chain Reaction Research found that forecast of 2016 revenue is $46 billion, 30% below 2015, due to poor semi-annual performance and asset sell down strategy which may shave 4.5% off expected 2016 operating earnings, 18% annualized. Impairments of palm oil assets and coal receivables may reduce balance sheet equity value by $400 million, or 12%. 33% of Noble’s palm oil landbank is undevelopable as it is primary forest and possibly peat. Coal assets are said to be overvalued by 30%. Syndicate banks have been involved in the recent rights issue and are also involved in the divestment of North America Energy Solutions (NAES), suggesting a conflict of interest coupled with possible mispricing of debt and future increase in borrowing costs. Net profit outlook for 2016 and beyond is below consensus due to divestments and expectations for higher interest rate. Risks for shareholders remain.

Download as PDF: Noble Group: Cost of Capital and Deforestation Risks Under Priced? (Revised)


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Economic Drivers of Deforestation: Sectors exposed to sustainability and financial risks
August 3, 2016
The link between deforestation and climate change is increasingly recognized in, for example, the 2015 Framework Convention on Climate Change’s Paris Agreement and elsewhere. This recognition is particularly important, as the planet has lost about 129 million hectares of forest since 1990. As deforestation is largely driven by specific economic activities and is thus a sector-specific risk, investors and banks must now pay far greater attention.

In four Latin American countries (Brazil, Colombia, Ecuador and Peru), over 70% of combined deforestation is linked to cattle ranching. In two African countries (Liberia and DRC), large-scale and subsistence agriculture are the primary drivers. Palm oil and other agricultural commodities, as well as mining and the exploitation of oil and gas are threatening forested areas in various countries. Logging is a recurrent factor in all forests, while infrastructure and hydropower contribute to deforestation in several countries.

Banks and investors can be exposed to deforestation risks directly, by investing in (multinational) companies operating in the identified sectors in these countries. But they can also be exposed indirectly, through downstream companies that buy commodities from these countries, or through governments and public banks that make infrastructure developments possible.

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IOI Corporation: Customers and Investors Want Sustainability
July 18, 2016
IOI’s March 2016 RSPO suspension is likely to result in lost revenue and reduced operating earnings, continued equity price downdrafts and reputational damage. To demonstrate that IOI understands its market and customers’ concerns, the company may want to focus on achieving RSPO compliance and RSPO Next certification and establishing stringent operational risk controls that properly manage its landbank. Yet, questions remain regarding whether RSPO Next is operational. IOI may benefit from employing a robust operational risk management framework built on sustainability, so as to demonstrate to investors the seriousness with which it takes its current RSPO suspension and its possible palm oil revenue at risk. Simply put, IOI cannot move forward without resolving its RSPO cases first.

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Palm Oil Revenue at Risk: Failure to Meet Buyers’ Procurement Policies Results in Lost Revenue
June 8, 2016
This report applies a Monte Carlo simulation technique to determine 2016 quarterly revenue at risk for three selected palm oil producers: Austindo Nusantara Jaya, Sawit Sumbermas Sarana and Provident Agro. The scenarios are based on a situation where each company has buyers that suspend purchases, from an undiversified buyer base, due to a failure to meet each buyer’s NDPE policies requirements. The scenario is based on actual revenue lost by these three companies in 2015 due to not meeting buyers’ NDPE policy requirements. After running 1,000 iterations, the analysis presents a 5% probability of revenue at risk. All three companies lost revenue due to non-compliance with buyers’ policies, failing either to identify the risk potential of their non-diversified buyer portfolio or to undertake timely action to mitigate, transfer or avoid it.

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Comprehensive Risk Analysis: Felda Global Ventures – RSPO credentials at risk, immediate cash flow impacts
April 21, 2016
New data shows that Felda Global Ventures Holdings Berhad (FGV:MK) is in breach of Roundtable on Sustainable Palm Oil (RSPO) standards, as its subsidiaries cleared 880 ha of identified High Conservation Value peatlands. RSPO certified sustainable palm oil (CSPO) often sells at a premium to crude palm oil (CPO), which means FGV may lose this premium if temporarily suspended from RSPO. Malaysian palm oil giant IOI Corporation was temporarily suspended from RSPO in March 2016. If FGV follows suit it could loose a CSPO premium of 1% to 2% compared to their average 2015 selling price, resulting in $6 to $12 million in cash-flow-at-risk in 2016, excluding broader market share losses.

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Comprehensive Risk Analysis: Possible IOI RSPO Suspension
February 16, 2016
The RSPO Complaints Panel’s pending decision on IOI Corporation’s (IOI:MK) operations in Sarawak and West Kalimantan concerns illegal land grabbing, peatland clearing and drainage, loss of High Conservation Value (HCV) forests, and planting palm oil trees illegally inside a forest reserve. RSPO’s certification procedures stipulate that such infractions may result in suspension of group membership. Should the Panel follow formal rules, IOI might experience a decrease in revenue from sales of its Certified Sustainable Palm Oil (CSPO) contracts, resulting in free cash flow contractions in a tight margin market.

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Overview Risk Analysis: Fires Burn Southeast Asian Assets
December 11, 2015
From July 1st to October 20th, 2015, 97,000 fires were detected in Indonesia, and over two million hectares of forest caught fire, one-third of which were High Carbon Stock peat forests. Investors may lose money as ineffective oversight and enforcement by plantation companies, as well as local and national government, has allowed fires to burn without proper control measures in place. The resulting haze in Southeast Asia is now a material financial issue for investors as governments, individuals, and investors consider legal and financial action. This analysis assesses some of the financial implications of the fire crisis in Indonesia and what it could mean for investment in the regional palm oil industry going forward.

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Comprehensive Risk Analysis: Sustainability and Legal Issues Pose Serious Financial Risk for SSMS
September 9, 2015
Sawit Sumbermas Sarana (SSMS), a large Indonesia palm oil producer, is exposed to significant financial risk due to sustainability and legal compliance issues that could prevent its plans for rapid growth in the coming months and years.

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Overview Risk Analysis: IDX-Listed Palm Oil Growers
June 30, 2015
Six out of ten largest palm oil growers listed on the Indonesian stock exchange (IDX) have high-risk exposure to major buyer/traders’ No Deforestation, No Peat, No Exploitation (NDPE) purchasing policies. Six out of these ten growers sell 50% or more of their crude palm oil and/or palm kernel oil to buyers that have adopted such policies for their supply chain.

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Comprehensive Risk Analysis: Triputra Agro Persada
May 21, 2015
Triputra Agro Persada (Triputra/TAP) is a privately owned Indonesian palm oil and rubber plantation company. This Comprehensive Risk Analysis gives an overview of the company, delves into the environmental and social issues it faces, and presents a financial analysis of how sustainability risks may impact the bottom line.

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Comprehensive Risk Analysis: Kuala Lumpur Kepong (KLK) Bhd.
February 26, 2015
Kuala Lumpur Kepong (KLK) Bhd. is a large Malaysian palm oil company that manages more than 200,000 hectares of palm oil plantations in Indonesia, Malysia and Liberia, and is active in the manufacturing of oleochemicals in Malaysia, China and Europe. This Comprehensive Risk Analysis gives an overview of the company, delves into the environmental and social issues it faces, and presents a financial analysis of how sustainability risks may impact the bottom line.

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Initial Risk Analysis: Golden Plantation Tbk.
December 11, 2014
From 15 to 17 December 2014, plantation company Golden Plantation Tbk. is making an Initial Public Offering (IPO) on the Indonesian Stock Exchange (IDX), with the aim of raising around IDR 230 billion (USD 15.2 million). The company is currently a full subsidiary of the Indonesian-listed food company PT Tiga Pilar Sejahtera Food Tbk (TPSF), which will still own 78% of the shares after the IPO. This Initial Risk Analysis provides an initial analysis of potential financial, sustainability and governance risks associated with PT Golden Plantation. It is meant to inform investors participating in the IPO, as well as shareholders of the American commodity trader Bunge and investors who have committed funds to the American private equity group KKR – which currently have a stake in PT Golden Plantations.

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Initial Risk Analysis: BW Plantation Tbk. [Now: PT Eagle High Plantations Tbk.]
November 19, 2014
On 24 November 2014, the shareholders of the Indonesian oil palm plantation company BW Plantation Tbk. will be asked to agree to a new rights issuance to finance the take-over of Green Eagle Holdings. To inform BW Plantation’s present shareholders about several risks associated with the proposal, Chain Reaction Research (CRR) is releasing this Initial Risk Analysis.

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Comprehensive Risk Analysis: Bumitama Agri Ltd.
October 16, 2014
Chain Reaction Research conducted a Comprehensive Risk Analysis of palm oil giant Bumitama Agri Ltd., and found that deforestation and other sustainability issues pose major financial risks. If not resolved, they could affect Bumitama’s access to its primary customers as well as global capital markets. However, the company has recently made serious moves towards addressing these issues, positioning itself to avoid some of the largest risks.
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Initial Risk Analysis: Sawit Sumbermas Sarana Tbk.
December 9, 2013
Chain Reaction Research conducted this Initial Risk Analysis identifying serious undisclosed risks associated with the scheduled December 12 Initial Public Offering of the palm oil company Sawit Subermas Sarana Tbk. on the Jakarta Stock Exchange.
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Comprehensive Risk Analysis: Felda Global Ventures Holdings Bhd (FGVH)
June 12, 2012
Oil palm plantation company Felda Global Ventures Holdings Bhd (FGVH) aims to raise RM 9.95 billion (€ 2.5 billion) from its listing on the Bursa Malaysia, making it the world’s second largest IPO in 2012 after Facebook. We initiate coverage on FGVH with an AVOID recommendation as our analysis shows that an accumulation of environmental, social and governance risks will result in serious financial risks for investors.
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