29/09/2011 (Jakarta Globe) - A new ministerial ruling that expands the land available for planting has made Indonesian crude palm oil producers an attractive proposition for investors, analysts at Credit Suisse Group say.

A report compiled by Teddy Oetomo and Agus Sandianto cited a forestry ministerial decree reported last week by Investor Daily that could result in more arable land for oil palms.

The decree stipulates that palm oil plantations will be deemed forestry plantations (HTI), along with other soft commodities such as coconut and rubber.

The decree says that palm oil companies can apply for licenses for planting in HTI areas by submitting a business plan to the Forestry Ministry.

“We foresee that the potential impact of this new decree, if it is fully implemented, is there may be additional areas for new palm oil planting in the future,” the analysts wrote.

Currently, palm oil producers can only plant their trees in non-forestry areas and convertible forest areas.

The total cultivated area for palm oil in Indonesia now stands at eight million hectares, while existing HTI areas total nine million hectares. The size of HTI areas is set by the Forestry Ministry.

Credit Suisse however, sees a possible backlog in the decree’s implementation.

“First, not all HTI areas are suitable for palm oil plantations, and second, the length of the revision process for the outstanding HTI licenses may remain unknown,” it said.

Due to such concerns, in the short to medium term, Credit Suisse says it sees minimal impact on CPO output from Indonesian planters.

“The length of period required to convert outstanding HTI licenses for use in palm oil remains uncertain,” the report says.

Indonesia, which overtook Malaysia in 2007 to become the world’s largest palm oil producer, is expected to produce about 23 million tons of the commodity in 2011, the Indonesian Palm Oil Association (Gapki) said earlier this year. That would be little changed from last year’s output of 23.6 million tons.

When CPO prices trade at 3,000 to 3,500 ringgit ($954 to $1,113) per ton, Indonesian producers benefit more than their Malaysian rivals, the analysts said.

Each 100 ringgit increase means that earnings rise as much as 4 percent among Indonesian planters, compared with 3 percent for Malaysian companies, they said. On Tuesday, the CPO price was 2,948 ringgit, down from nearly 4,000 ringgit early this year.

The Indonesian government has said it will cut the maximum tax paid on CPO exports to 22.5 percent, from 25 percent currently. It will also slash the duty on olein, a derivative product of palm oil, to 13 percent from 25 percent, starting on Oct. 1.

A lower export tax would boost the income of producers in Indonesia, including those listed overseas.

Credit Suisse said that Indonesian plantation companies were currently trading cheaply, at 11.1 times estimated earnings compared to 14.6 times for Malaysian companies.

Credit Suisse maintained its “outperform” ratings on London Sumatra Plantation, Salim Ivomas and Indofood Agri, “due to their relatively less demanding valuations.” It maintained “neutral” ratings on Sampoerna Agro and Astra Agro Lestari.

Trimegah Securities, a Jakarta-based securities company, was less bullish on the sector.

The brokerage has a neutral rating on the sector as it “believes there is no significant catalyst that could re-rate the stock in the near term,” equity analyst Andrian Tanuwijaya said in a research report last week.

Trimegah also said the downside risk was limited “as the market has priced in the declining trend on CPO prices since the first quarter.”