Malaysia's political shock to the CPO price?

Khor Reports: Our comment on recent steep CPO price drop. For the first time since the Global Financial Crisis, CPO price has fallen below Brent.

We are hearing from the market various reasons. 1) Demand has been relatively stable (China buying stabilizing, high growth markets reducing buying at high prices etc) vs rising seasonal supply. 2) Biodiesel mandate in the EU to be cut in the future. 3) Technical charts have "broken". 4) Malaysia's one year policy paralysis vs Indonesia's change in export duty structure has resulted in slower sales from Malaysia, building up stocks. Perhaps most interesting is this one, 5) The deleterious and unintended impact of Malaysia's policy to add another 2 million tonnes of CPO export duty free quota in 2012. Market participants commonly say that they reckon that 1/2 of the usual 3-3.5 million tonne annual quota, has gone to non-market players. There is suspicion that the additional quota for this year may have been given mostly if not entirely to non-market players and/or "market underperformers". After all, this is election or pre-election year in Malaysia, where political largesse is directed toward likely supporters i.e. via special contracts, licenses or quotas. In Malaysian parlance, quota holders are now often dubbed as "AP holders" (likening them to the import licence multi-millionaires created in the its tightly controlled automobile market). However, instead of helping clear CPO stocks in Malaysia and boost prices, the added 2 million tonnes quota may have seriously backfired. The market reckons that the quota recipients, hoping to make a fee by flogging the quota certificates, may have found few if no takers among the big palm oil companies and traders (who are capable of moving the product). The regular players would see no need to pay a special premium in a big and liquid market (after all, lower prices will also clear the market and the quotas will expire). Thus, the special Malaysia CPO quota players may have been left with quotas they are unable to "palm off." Furthermore, they are also incapable of effectively moving the CPO into the world market. Worse, some may have taken trading positions, and with the steep drop in CPO price, may now also face big trading losses. Thus, has there been an added crunch in the palm oil market, as a result of Malaysia's shock attempt to generate special quotas for an unknown group of recipients (there is talk that they are are under "Official Secrets Act" non-disclosure protection). A lesson in how politics in the second largest palm oil producing country might create a small shock to the commodity price? An interesting theory.

AP = "approved permit"

Updated 5.30pm: Note the mention of surrender of the "approved permits" or APs on CPO: "The minister (Bernard Dompok) also noted that for this move to be effective, there has to be curbing exports of duty-free CPO as well. "Out of the quota of five million tonnes of duty free CPO we've allowed to be exported, only half has been utilised. I want the companies which have not used up their quotas to surrender back the approved permits," he added... http://www.mpoc.org.my/Malaysia_to_Slash_CPO_Export_Tax.aspx

Felda Global listing: over RM600 million in profits pocketed so far?

Felda Global listing was "designed to succeed," over RM600 million in profits pocketed so far? Khor Reports.

Thank you for your overwhelming interest in our report on "Felda Global - a socio-political perspective" issued back in May. We were interviewed by Al Jazeera, Bloomberg and Reuters on the mega-listing, quoted in the Financial Times, The Edge Malaysia and also cited in some international reports.

I've had some queries and I thought more of you may be wondering what's been happening with share trading in Felda Global so far. It's about a month and a half since the listing on 28 June. I've compiled some statistics on price and volumes traded to give a picture of what is the value of shares traded and how much profits may have been made in this so-called "designed to succeed" listing; it was the 2nd largest in the world after Facebook.

Data briefing and analysis paper issued by Khor Reports on 16 August 2012. Please contact us for a copy.

100tC/ha ceiling?

Khor Reports: Palm oil rumour-mill reckons that a 100tC/ha carbon stocks ceiling is now being considered by GAR-TFT for new land development by oil palm plantations.

This is up from the initial ceiling of 35tC/ha mooted in the Nestle-GAR-TFT deal, where GAR or Golden-Agri-Resources, part of the Sinar Mas Group, also agreed to no planting on any peat land.

Cambodia local elections impacted by land discontent?

Cambodian PM's party triumphs in election test run,PHNOM PENH | Tue Jun 5, 2012 5:37am EDT:"Official results from Sunday's elections for the chiefs of areas known as communes are not expected for several weeks but the major parties were in agreement that Hun Sen's Cambodian People's Party (CPP) had swept the polls, as it has in all national ballots in the past decade. The CPP claimed 72 percent of the seats in what it sees as a test of support ahead of the 2013 election. General elections take place every five years....The latest polls did throw up some signs of discontent, with the CPP's notable loss of seats in areas that have seen long-running land disputes and forced evictions from land leased to foreign companies. The government suspended new land concessions to foreign firms in May...." http://www.reuters.com/article/2012/06/05/us-cambodia-elections-idUSBRE8540E420120605

Khor Reports comment: In the 2007 commune elections, the Cambodian People's Party won 1,592 commune chief (97%) out of 1,633 communes. The claimed victory of 72% of seats last month suggests a 17%-age point reduction in the number of seats. Just before the elections, new economic land concessions to foreigners were frozen. In the previous two years, there had been a surge in award of such concessions. Land disputes seem to be rife and these have apparently impacted on the ruling party's electoral results, although it still holds a very commanding position. When we started to research Cambodia agricultural concessions several years ago, there was little sign of NGO activity. Now, there are several active on land dispute matters. One is focused on sugar projects, lobbying foreign-buyers to boycott Cambodian sugar because of land conflicts.

50% utilization plus excess soybean demand in China?

Khor Reports notes and comments:  

In a report on earnings risks at Wilmar’s “oilseeds & grains” business, by brokerage Kim Eng, dated 5 July, “Times not soy good anymore”, target price: 3.25 on 1.2x p/b some interesting data points: 

a) Soybean crushing utilization at 50% with continued China SOE expansion (apparently to reduce market share of foreign companies ); 

b) anecdotes on soybeans as a form of alternate financing of real estate/ stock market investments over last 2 years (page 4). Does this have some sort of parallel with availability of palm oil below global market prices in China?

Felda Global leaps to "target" and 12% cash-in? (correction)

Khor Reports notes and comments: 

The opening push on Felda Global took the stock to RM5.46, a whisker below the RM5.50-6.00 range that market experts mentioned over a month ago to Khor Reports as the “hoped for” target; as we reported in “FELDA SETTLERS & THE FELDA GLOBAL IPO – a socio‐political perspective” dated 22 May 2012. 

Felda Global's shares closed the day at RM5.30, for a gain of 19% on the RM4.45 per share price for the public (institutions paid RM4.55)#. At this price, its earnings valuation is 15.7x, compared to 17.5x for KL Kepong, 14.4x for Sime Darby and 9.5x for Golden Agri. 

On a day when RM2.8 billion worth of securities were traded on Bursa Malaysia, RM1.5 billion was in the plantation sector. Felda Global was enjoying its debut, and it generated a huge value traded of about RM1.4 billion, or half of the Malaysian bourse's activity. It's not yet part of the FBM KLCI index of 30 stocks@, but it is expected to enter in the future. Among the largest Malaysian plantation stocks, Felda Global's RM19.3 billion market capitalization currently puts it behind KL Kepong with RM24.5 billion, but ahead of PPB Group (which has a key stake in Wilmar International) with RM18.8 billion.

Holders of shares from the offer for sale and the public issue will be sitting pretty with gains in excess of RM1.4 billion today, with about 12% trading their holdings on the first day, locking in gains of some RM170 million.

However, a Reuters news article raises questions about how the shares in Felda Global were allocated. It quotes: "This Felda IPO is an embarrassment," said an official with a Malaysian bank-backed fund management firm. "About 23 percent of the book was allocated to 'friends and family', all at the expense of legitimate investors with potential synergies."  

The share allocation by Felda Global is summarised in its IPO prospectus in the table below, but there is little information yet on total shares allocated to key executives and details of major shareholders.

 @ http://www.ftse.com/objects/csv_to_table.jsp?infoCode=bm1c&theseFilters=&csvAll=&theseColumns=MSwyLDMsMjA=&theseTitles=&tableTitle=FTSE%20Bursa%20Malaysia%20KLCI&dl=&p_encoded=1

#Correction at 11.20am on 29 June 2012, of 2nd paragraph on retail and institutional price, so that the gain is 19% not 16.5% on retail IPO price.

Some news reports:

The Edge Malaysia: "FGV is the third largest planter in the world after Sime Darby and Singapore-listed Golden Agri-Resources Ltd. As a yardstick, Sime is currently trading at an average of roughly 14.4 times estimated earnings for 2012/13, and Golden Agri at 63 Singapore cents is valued at 9.5 times estimated earnings for 2012 and and 8.8 times for 2013."  http://www.theedgemalaysia.com/business-news/216198-fgvh-fails-to-sustain-debut-momentum-.html

Reuters:

"The strong debut beat market expectations of a first day pop of 10 percent and brushed aside, for now, a widely flagged 36 percent drop in Felda Global's first-quarter profit to 223.2 million ringgit ($70 million) that unnerved some investors."

"To keep the farmers happy, government-linked funds and the domestic pension fund, which accounted for part of the institutional tranche, made a rush for the stock during the book-building process."

"This Felda IPO is an embarrassment," said an official with a Malaysian bank-backed fund management firm. "About 23 percent of the book was allocated to 'friends and family', all at the expense of legitimate investors with potential synergies."

Reuters news feature, "Malaysia's Felda surges 20 percent in debut of world's No.2 IPO," http://www.reuters.com/article/2012/06/28/us-malaysia-felda-ipo-idUSBRE85R07S20120628

Felda Global saved major embarrassment over Dreyfus?

Khor Reports notes & comment: 

Last minute negotiations seem to save Felda Global from serious embarrassment, as it doesn't lose one of its (if not "the" most) prominent strategic investors - Louis Dreyfus Commodities. 

However, from an initial offer of 5% to a final take-up of a 0.5% stake (a 90% reduction), as widely reported in newspapers, this seems cold comfort. Thus, 10% of what was initially offered was finally done, and apparently well past the expected cut-off date. Felda Global says that the stake was reduced because of high IPO demand. 

Industry commentators contrast this 0.5% stake with fellow global commodity giant, Archer Daniels Midland's (ADM) 16.4% interest in Wilmar@. Despite the low figure, the 0.5% stake is still touted as a "strategic investment."

On 21 June, the FT notes: "The involvement of Dreyfus as a strategic investor was widely seen as a key element of the biggest IPO since Facebook’s stock market listing last month...“It’s [the Dreyfus involvement] something that’s been pretty prominently talked about as a big ticket item and it’s an embarrassment. This was something that was meant to be a key part of the IPO,” a third person said. “There is a lot of tension and heated tempers right now.”...."  

A strategic partnership is apparently also now in place, although details were not disclosed. It is likely that Louis Dreyfus Commodities sought to market Felda Global's palm oil; but we hear from industry sources that Felda Global may not have been entirely keen to outsource its marketing to third parties.

It would have been interesting to be the proverbial "fly on the wall" when Felda Global and Louis Dreyfus thrashed out the latest strategic investment and strategic partnership. Did Felda Global have to offer better terms to Louis Dreyfus to lure them back, after news reports that its expected stake was given out to others? Was an even better, lower effective price, given to the commodity company?

News articles:

http://www.ft.com/cms/s/0/800756e4-bc48-11e1-a470-00144feabdc0.html#axzz1yfKnP7zo

http://www.reuters.com/article/2012/06/22/felda-louisdreyfus-idUSL3E8HM1M520120622

@"The Company has a 16.4% ownership interest in Wilmar International Limited (Wilmar), a Singapore publicly listed company. Wilmar, a leading agribusiness group in Asia, is engaged in the businesses of oil palm cultivation, oilseeds crushing, edible oils refining, sugar, consumer pack edible oils processing and merchandising, specialty fats, oleo chemicals, biodiesel, fertilizers and soy protein manufacturing, rice and flour milling, and grains merchandising...." 

http://www.adm.com/en-US/investors/Documents/2011-ADM-Annual-Report-EN.pdf