Following work done by Greenpeace to expose the illegal deforestation perpetrated by Indonesian palm oil giant Sinar Mas, Friends of the Earth has released a report on Malaysian palm oil giant IOI Group, accusing it of illegal deforestation and "intentional fraud." This report follows major press coverage of Nestle's decision to drop Sinar Mas from its supply chain because of mounting evidence that the latter is engaging in irresponsible destruction of high conservation value rainforest.
IOI is a major supplier of palm oil. Amongst its high profile clients are Nestle, the world's largest consumer foods group known for its global brands such as Kit Kat, and Neste Oil, a leading oil refining and marketing company which recently built a major biofuels refinery in Singapore.
IOI expanded its operations to Indonesia in 2007 in order to meet the increasing demand. The company bought over 150,000 hectares of new concessions on Borneo and it is on these concessions that IOI is accused of illegally clearing rainforest, peat land and habitat of the endangered orangutans. IOI is also a palm oil intermediary in the sourcing of palm oil from other producers to meet the demand of its customers.
As a palm oil plantation developer and producer, IOI is accused of
"No approved environmental impact assessments ... Fraudulent statements ... Unauthorised plantation development in forestland ... Encroachment in forested land ... Fires on IOI concessions in Ketapang ... Land conflicts in the making"
As a palm oil trader, IOI is part of the "chain of destruction" from environmentally destructive palm oil producers to food products retailers:
(click image for full size picture)
Indeed, the pressure is mounting on the palm oil industry to put a halt to its corporate social hypocrisy. Two of the largest palm oil producers have been "Caught Red Handed" and it is time for the destruction to stop.
OCBC investment research's Carey Wong recently released a research note in response to the latest action by Nestle to terminate its direct palm oil purchases with Sinar Mas, which operates palm plantations through its Singapore listed subsidiary Golden Agri Resources. In her research note (signed off by head of research, Carmen Lee), Carey said:
Financial impact likely limited. While SMART did not reveal how much Nestle contributed to its sales, we understand that it is likely pretty insignificant at less than 0.5% of overall sales; this as the group sells most of its CPO to customers in China and India, where demand for CPO is expected to track the rapid urbanization in these countries. As such, the financial impact from the latest development, if any, will probably be very limited for GAR, although SMART may suffer some minor setback to its reputation. On that note, we believe that the adherence to guidelines laid out by RSPO (Roundtable for Sustainable Palm Oil) will become more important as the Nestle development suggests that businesses are paying more attention to “green practices”.
Maintain BUY with S$0.66 fair value. However, the push for full RSPO-certified CPO is still expected to be quite gradual; a Dow Jones report estimates that the total amount produced through sustainable methods is still quite small at 1.5m tons, as compared to the 45m tons of annual CPO output globally. As such, we continue to remain upbeat about GAR’s medium-term prospects and maintain our BUY rating and S$0.66 fair value.
Indeed, it is true that the direct contracts with Nestle constitute but a tiny fraction of Sinar Mas' overall sales and the immediate short-term financial impact is likely to be negligible.
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However, Carey has conveniently ignored the high probability of other customers and intermediaries cutting Sinar Mas from their value chains. Cargill and IOI, both major intermediaries and purchasers of palm oil from Sinar Mas, are coming under pressure from environmental groups and customers for not terminating their purchases from now notorious illegal deforester Sinar Mas. Indeed, Nestle itself is putting pressure on Cargill to ensure that Sinar Mas is eliminated completely from its value chain. IOI has also recently come under fire for its environmentally destructive practices in the development of Indonesian Palm Oil plantations. The chance of further financial impact is not insignificant.
In any case, whether or not Sinar Mas eventually suffers financially from its fracas, I find it distasteful and socially irresponsible for OCBC to promote a business that wilfully and illegally destroys high conservation value rainforest while claiming that it is a responsible member of the "Roundtable of Sustainable Palm Oil." Through the promotion of Golden Agri stock, OCBC shows that it is willing to turn a blind eye to environmentally destructive practices and corporate social hypocrisy, in the pursuit of profits.
And just a point of note - in a detailed comparative profitability analysis of the 5 SGX listed palm oil stocks, Golden Agri has come in last, by a mile.
Hence, how on earth can any analyst with a conscience consider Golden Agri to be a buy?
First Resources Limited is one of the leading oil palm plantation companies in Indonesia. It is an upstream operator with primary business activities in the cultivation and harvesting of oil palms, and the processing of fresh fruit bunches into crude palm oil for local and export sales. Established in 1992, FR is one of the fastest-growing plantation companies in the region. It manages more than 100,000 hectares of planted oil palm plantations and operate 8 palm oil mills in Indonesia. FR's plantations produced approximately 1.4 million tons of fresh fruits bunches and 323,000 tons of crude palm oil in 2008.
Following my profitability analysis and valuation analysis, FR has proven to be one of the interesting stocks amongst the 5 palm oil listed business in SGX. The following charts are a detailed fundamental analysis of First Resources from FY 2006 - FY 2009. (click charts for full sized image)
First Resources scored very well on the comparative profitability analysis, coming in first amongst its peers. It is interesting to note that this is despite the fact that its profitability numbers actually declined from FY2008 to FY2009. Across the board FR shows consistently high profitability. It consistently posts ROE above 20% and ROA above 15%. FR's high profitability is not a flash in the pan.
FR's profit margins are also consistent. Even with the big fluctuations in CPO prices up and down, gains in biological assets appear to be quite consistent over time. Gross and operating margins are also fairly consistent. Net profit margin has been rising since FY 2007, it is likely to revert to the mean.
FR's leverage has been consistently improving over time since IPO. If the company keeps this up, this is good for shareholders as it means that financial risk is lowered.
Asset utilisation is fairly consistent. Good upward trend in the receivables turnover.
Fairly consistent asset composition.
All in all, nothing very alarming, in fact good profitability numbers over time are a good sign for prospective investors in this stock.
Based on the latest FY 2009 earnings and balance sheets statements, here are the relative valuation multiples for the 5 SGX listed palm oil stocks. The relative valuation is based on 2 key multiples: the price/earnings ratio and the price/book ratio
Wilmar Int
Golden Agri
Indo Agri
First Res
Kencana Agri
Price per Share (SGD)
6.55
0.56
2.19
1.15
0.295
Price/Earnings Ratio
15.58
8.01
9.98
9.30
12.60
Price/Book Ratio
2.69
0.88
1.58
1.95
1.47
As can be seen, Wilmar has the highest P/E ratio. This is despite the fact that it is not the most profitable of all the companies. However, it is definitely the largest of all the companies. Its size and reputation definitely contributes to the fact that its P/E is the highest of all the 5 companies. In contrast, Golden Agri has the lowest valuation of all the 5 companies, and this is in line with its poor profitability.
Meanwhile, taking into consideration the profitability rankings, it seems that First Resources looks very reasonably valued on the basis of its P/E ratio, relative to its peers.
Based on the Price/Book ratio, Wilmar is again the most expensive. Golden Agri is the cheapest. However, this time First resources is not particularly cheap compared to the others. It has a high P/B, that partly reflects its high ROE.
Roundup: Based on all the profitability numbers and the valuation numbers, it seems that First Resources is the most reasonable buy amongst all the 5 SGX listed palm oil stocks, purely based on a financial analysis.
Unilever, Nestle, Kraft, Shell and Sainsbury have all cut notorious rainforest destroyer Sinar Mas from their list of palm oil suppliers. However, Cargill, the multinational commodities trading giant, is yet to follow the lead of its corporate peers in taking a firm stand on corporate social responsibility and environmental protection.
Despite clear evidence that Sinar Mas, the largest palm oil producer in Indonesia, is illegally logging and clearing high conservation value rainforest and peatlands, and in the process further threatening endagered species like the Orangutan, and contributing to greenhouse gas emissions, Cargill is still mucking around on the issue.
Cargill's role in the 'chain of destruction' is illustrated in the image below. The company is a middleman between the producers of the palm oil and the final users of the same.
Cargill is keenly aware about the allegations made in December 2009 by Greenpeace about illegal forest clearance and the Indonesian palm oil company, Sinar Mas.
When we became aware of the Greenpeace report we contacted Sinar Mas’s senior management and we have communicated to them that we are looking to them to address the issues in the Greenpeace report. Additionally, we urged the RSPO board to review this issue. We are pleased the RSPO Board has instructed the RSPO Secretariat to get a response from Sinar Mas to the allegations in the Greenpeace report. We are continuing to follow this closely and hope to see a reply from Sinar Mas by the end of April 2010.
If the RSPO validates the allegations of improper land conversion or illegal planting in deep peat land as alleged in the Greenpeace report and Sinar Mas does not take corrective action, we will delist them.
The recent actions by Nestle and Unilever, however, demonstrate that Cargill's corporate peers have rejected the credibility of the RSPO. Indeed, the evidence of Sinar Mas' illegal and environmentally destructive activities comes in spite the fact that the company is supposedly 'certified' by the RSPO.
So if within the palm oil industry there’s all this awareness of the potential damage they could cause to both people and the environment, why are we still finding evidence of wholesale forest destruction? Just a couple of weeks ago, we found bulldozers belonging to Sinar Mas clearing huge tracts near Jayapura in Papua, and yet Sinar Mas is an RSPO member. There’s obviously something wrong somewhere.
That something is the basic set-up of the RSPO itself. As it currently exists, its standards and principles are too vague and weak to really do any good and, as we’ve seen, some of its members are happily chewing their way through rainforests and carbon-rich peatlands. There’s no danger of actually being penalised in any way by the RSPO, even though they’re supposed to abide by the code of conduct which states “it is fundamental to the integrity, credibility and continued progress of the RSPO that every member supports, promotes and works towards the production, procurement and use of sustainable palm oil.” What kind of “integrity” or “credibility” does the RSPO have if it turns a blind eye when its members are clearing huge areas of forest or draining and burning peatlands?
Indeed, the whole point of the Greenpeace allegations is that RSPO is an organisation set up to give the palm oil producing industry merely the image of promoting corporate social responsibility, while at the same time engaging in corporate social hypocrisy. Going through the RSPO to hold Sinar Mas accountable completely misses the crux of the matter. It highly unlikely that the RSPO will ever "validate the allegations of improper land conversion or illegal planting in deep peat land"
Meanwhile, Sinar Mas continues to sidestep the issue and release more propaganda. There have been no statements coming directly from the company engaging directly the Greenpeace allegations. Instead, Bloomberg BusinessWeek reported:
PT Sinar Mas Agro Resources and Technology, Sinar Mas’s palm oil unit, is “committed in applying a responsible land clearing and the best practice of farming management in all of our plantations,” President Director Jo Daud Dharsono said by phone today. “We always maintain communication with Greenpeace and we will soon arrange a meeting and have a dialogue with them,” he said..
Sinar Mas is obviously denying the issue and trying to sidestep their way around it.
Cargill should stop depending on the RSPO to hold Sinar Mas accountable, and instead should conduct its own independent audit of Sinar Mas' environmental practices. It should demand a direct response from Sinar Mas to the allegations, rather than going through the dubious RSPO. Indeed, in the light of the undeniable evidence and the actions of Unilever, Nestle, and other food giants, Cargill should suspend all purchases of palm oil from Sinar Mas immediately until the latter is able to demonstrate that the allegations are false.
There is no excuse for Cargill to do otherwise. Cut Sinar Mas palm oil immediately!!!
Singapore listed Golden Agri Resources' (GAR) Indonesian plantation subsidiary PT Sinar Mas Agro Resources & Technology Tbk continues to come under pressure from multinational consumer goods giants. Following the lead of consumer good giant Unilever who cease purchasing palm oil from the group late in 2009, food products giant Nestle today announced that it had terminated its palm oil purchases from SMART following damning evidence released by the group Greenpeace that SMART is engaging in illegal and environmentally destructive deforestation.
Given the repeated track record of Sinar Mas businesses in flouting environmental regulations and its notoriety for illegal deforestation, it is not surprising that the GAR subsidiary is receiving similar bad press for its deforestation activities. It appears that Mr Franky Widjaja is following the footsteps of his father in the wanton destruction of rainforests in the pursuit of profits.
Franky Oesman Widjaja has been the Chief Executive Officer of Golden Agri-resources Ltd. since 1996. Mr. Widjaja serves as the head of the Agri-Business and Consumer Food Products Division of the Sinar Mas Group. Franky Widjaja is one of the sons of Eka Widjaja, founder of the Sinar Mas Group, which was one of the largest conglomerates during the Indonesian New Order period.
The Sinar Mas Group also owns Asian Pulp and Paper, a company that has been convicted of being involved in illegal logging in Cambodia, Yunnan Province, China , and the illegal felling of over 50,000 acres (200 km2) of forest in Bukit Tigapuluh national park.
Golden Agri Resources has yet to respond to the decision by Nestle. It earlier claimed that Greenpeace's assertions were "inaccurate and unbalanced allegations." In an announcement dated 15 Dec 2009, the company said:
Greenpeace’s allegations highlighted several issues related to the environmental irregularities and legality issues purported to have been committed by the Company. We regret that the report has published one-sided views using inaccurate, misleading, exaggerated and generalised data and claims. This can result in misconceptions among the general public as well as form an inaccurate basis for decision making by our business partners.
The Company appreciates every effort by all parties that encourage the oil palm industry to always adopt and adhere to the best agricultural practices. It has always been the focus of the Company to comply with all prevailing Indonesian laws and regulations as well as national and international environmental principles.
Since the beginning of its operations and especially during the last 15 years, the Company has committed to base its development on objective of sustainable palm oil production. Indeed, the Company believes that there is strong compatibility between environmental care and agricultural development.
Despite this announcement 3 months ago, it appears that its client Nestle remains unconvinced with the public statements of GAR and its subsidiary SMART. And despite the claims by GAR that Greenpeace's allegations are "one-sided views using inaccurate, misleading, exaggerated and generalised data," independent consultants of UniLever and Nestle have corroborated the Greenpeace claims.
It is highly unlikely that either of Unilever, Nestle, Sainsbury and Shell, who have all ceased buying palm oil from Sinar Mas, would have undertaken such drastic actions if there were poor bases to the allegations made by Greenpeace. Furthermore, apart from releasing press statements claiming that they have been falsely accused, GAR has yet to release a detailed rebuttal to the well constructed arguments and evidence as published by Greenpeace.
For now, the burden of proof remains on GAR to demonstrate that it is indeed taking steps to be socially and environmentally responsible in its business practices. The company's press released are unconvincing in light of all the available information.
"Under the Willow Tree" fully supports socially responsible development of palm oil plantations. Only companies that demonstrate that they produce palm oil sustainably will be endorsed as investments. Hence, in light of recent developments, GAR is not endorsed as an investment by this website. In any case, Golden Agri has not performed well in our recent comparative profitability analysis. In fact, it came in last of all the 5 sgx listed palm oil stocks.
Greenpeace is in the news yet again in its efforts to put pressure on companies which are seen to proliferate the deforestation and carbon emissions caused by palm oil plantation development in Indonesia.
Greenpeace's report 'Caught Red handed', published on 17 March 2010, revealed that multinational food giant Nestle has been using palm oil from Indonesia in products like Kit-Kat. According to the report, the palm oil is sourced from plantations grown on cleared Indonesian rainforests.
In response to this report, and following the lead of consumer goods giant Unilever, Nestle has announced that it will cease purchasing palm oil from Indonesian palm oil giant Sinar Mas, which is the party accused by Greenpeace of illegal rainforest clearance which is pushing Orangutans to the brink of extinction and accelerating climate change due to the burning of peatlands, which are major carbon sinks.
According to the Greenpeace report, Sinar Mas' past operations and the location of its known land banks mean that the the vast majority of this expansion will involve deforestation, some on protected carbon rich peatlands and in critical orang‑utan habitat. In the face of Sinar Mas’ unacceptable environmental and social practices, Unilever cancelled its $30 million contract with the company at the end of 2009, while Kraft cancelled its contract in early 2010. Sainsbury’s and Shell have also stated that they will not buy palm oil from Sinar Mas.
The "chain of destruction" from Sinar Mas to Nestle is illustrated in the above diagram (source: Greenpeace).
"We share the deep concern about the serious environmental threat to rainforests and peat fields in South East Asia caused by the planting of palm oil plantations. The company recently announced its commitment to using only "Certified Sustainable Palm Oil" by 2015, when sufficient quantities should be available.
Because of our commitment, we are taking all feasible steps to impact our suppliers to assure that we don’t buy palm oil which contributes to deforestation.
As a part of this commitment, we have accelerated the investigation of our palm oil supply chain to identify any palm oil source which does not meet our high standards for sustainability. Given our uncompromising food safety standards, we have done this in a deliberate manner as we use palm oil for food products rather than for soap or other personal care products.
Specifically, Nestlé has replaced the Indonesian company Sinar Mas as a supplier of palm oil with another supplier for further shipments. We confirm that Nestlé has only bought from Sinar Mas for manufacturing in Indonesia, and no palm oil bought from Sinar Mas has been used by Nestlé for manufacturing in any other country. "
The latest move by Nestle must be hailed as a victory by Greenpeace and other environmental groups in the war against irresponsible deforestation and unsustainable practices in the sourcing of palm oil. The termination of sourcing of palm oil from Sinar Mas by Nestle and other major multinational giants sends a clear signal that unsustainable business practices will not be tolerated by the community.
Yet, there remain significant hurdles to the deforestation challenge posed by the development of palm oil. Palm oil prices in recent years have been on an upward tear, primarily driven by demand from the booming mega economies of China and India for cooking oil. This demand growth remains strong and looks to be the primary driver of palm oil industry growth in the years to come.
However, judging by the outcomes of the recent Copenhagen summit, these two countries are not known for their leadership on environmental issues and are unlikely to make similar moves like those taken by Nestle and Unilever. Furthermore, intermediate suppliers of palm oil such as commodities giant Cargill say they can’t currently guarantee that one particular company is excluded, due to the mingling of palm oil in a very complex supply chain.
It will take significant pressure not just from the American & Euro multinationals but from the retailers of palm oil products & palm oil derivatives in China and India in order to get the Indonesian palm oil producers to stop their unsustainable business practices. A lack of pressure from these booming emerging economies will give the palm oil producers little incentive to stop their rainforest clearing while there remains profits to be earned. Indeed, the only way to get these businesses to protect the environment is to hit them where it hurts the most: their coffers
The lack of legal enforcement by the Indonesian authorities against illegal rainforest clearing also calls into question the political system of the Indonesian government. Greenpeace reports that
Many new plantations are located on peat that is off limits to development or degradation under Indonesian law. Ministerial Decrees have stipulated that peatlands of three metres deep or more must be protected and should not be converted to plantations. Greenpeace has documented such clearance on concessions belonging to Nestlé’s supplier Sinar Mas and Unilever consultants concluded in their audit that:
‘Sinar Mas has cleared and planted [such] peatlands. The total peatland area could not be determined because the company did not provide insight in its soil maps.’ In 2009, FFI conducted a High Conservation Value assessment in a Sinar Mas owned plantation (PT Kartika Prima Cipta). The results confirmed that the plantation concession contained deep peat (as deep as seven metres in some places – and so protected under Indonesian law), and that clearance of this area was already underway. During a public consultation on the issue, it was revealedthat Sinar Mas had agreed to stop clearance in the concession area following this first field visit by FFI. However, a later field verification mission conducted in August 2009 by FFI and Sinar Mas confirmed that clearance of peat forest had continued since that first visit, and peat drainage channels had been dug.
Questions must be asked why, in the presence of clear evidence of illegal activity by Sinar Mas, has the Indonesian government not taken disciplinary action against the company for breaking the law. Are government officials in cahoots with the business officials in the destruction of the environment?
Ultimately, the Indonesian people themselves must summon the political will to protect their own environment and their own communities. Failing which, there is little that can be done if they want to destroy their own back yard.
"Under the Willow Tree" fully supports socially responsible development of palm oil plantations. Only companies that demonstrate that they produce palm oil sustainably will be endorsed as investments.
