The Chain: Recapitalization As A Result Of Indonesia's Palm Oil Moratorium, IPOs Now Expected

by: Gabriel Thoumi, CFA

Summary

Indonesian Exchange Removes IPO Listing Fee.

Astra Agro Lestari’s Proposes Recapitalization (AALI:IJ).

Provident Agro Proposes Divestment (PALM:IJ).

Indonesian Five-Year Moratorium

As Chain Reaction Research reported previously, in April Indonesia's President Joko Widodo proposed a five-year moratorium on new palm oil concessions. On July 15th, further information was released by Pak Darmin Nasution, Indonesian Coordinating Minister for Economic Affairs, who was previously the Governor of Bank of Indonesia from 2010 to 2013.

The moratorium has four phases:

  1. In the first phase the Indonesian government denied requests for 851,000 hectares of new plantations.
  2. In the second phase, the government cancelled 600,000 hectares of new concessions that had been previously approved "in-principle".
  3. In the third phase, the government rejected all forest-release permits for 2015-2016.
  4. And in the still pending fourth and final phase, the Environment and Forestry Ministry will review currently outstanding and permitted forest-release permits.

Astra Agro Lestari's Proposes Recapitalization

Despite Astra Agro Lestari's (AALI:IJ) declining crude palm oil production year-to-date of 12% and a 75% decline in net profit year-over-year 2014 to 2015, AALI is seeking to return to the capital markets to raise more funds. AALI wants to raise an estimated $298 million in a rights issuance to pay off its debts and lower its debt ratio from 66% to 14%. AALI's parent company Astra International currently owns 79.7% of the company. If the rights insurance is successful Astra International could end up owning 83.4% of AALI.

Rights give shareholders the "opportunity" to purchase shares directly from the company at a discount for a short period of time. In effect, AALI may be trying to raise capital to expand its landbank given that it has budgeted $76 million in 2016 for "planting new areas," which may be contrary to their 2015 zero-deforestation pledge. The "planting new areas" also could be previously cleared land.

This distinction between clearing existing forests contrary to Indonesian law and buyers'No Deforestation, No Peat, No Exploitation (NDPE) policies and recently legally cleared land needs to be clear to investors before investing in the rights issuance.

Provident Agro Proposes Divestment

Provident Agro (PALM:IJ) is in a similar situation. As previously reported, the company faces 2016 with 37% quarterly palm oil revenue at risk, based on Q4 2015 actual revenue losses of 15% when PALM did not meet buyers' policy expectations. In light of this, PALM is expected to raise $206 million by selling shares in four subsidiaries to finance subsidiary operations and future expansion.

According to Indonesian NGO WAHLI, PALM was responsible for fires that destroyed 2.6 million hectares in 2015, resulting in 21 deaths and 500,000 individuals with long-term health impacts. By raising capital through issuing more shares for its subsidiaries and diluting current owners' equity positions, PALM can decrease their ownership in these troubled assets. As a result, it is possible that PALM's subsidiaries might be spun-off in a new IPO - though that has not yet been announced.

Indonesian Exchange Removes IPO Listing Fee

The Indonesian Stock Exchange has suspended initial IPO listing fees for new companies until March 31, 2017. Listing requirements do not include NDPE criteria, which means that companies can legally raise funds on the Indonesian Stock Exchange to clear and deforest Indonesian peatlands.

Yet the Indonesian Stock Exchange is a member of the United Nations Sustainable Stock Exchange initiative which seeks to promote listing standards for IPOs and equities that prevent instances such as this possibility.

Also, the Indonesian Stock Exchange is also a member of the World Federation of Exchanges, which also recently launched "material" listing standards guidance that would require reporting annually of direct and indirect scope 1 and 2 greenhouse gas emissions; total emission relative to revenue, total amount of water consumed, recycled or reclaimed; a firm wide environmental policy that reports existing and potential legal liabilities; and an overall sustainability report that helps investors understand how a company can outcompete its competitors on material ESG matters.

Finally, as the Indonesian Stock Exchange is not currently suggesting as guidance or requiring material ESG criteria as a function of listing a company on the exchange, the Exchange may be promoting raising capital from investors to finance carbon pollution and illegal land clearing according to Indonesian law.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I wrote this article for www.chainreactionresearch.com and I have the authority to publish it on Seeking Alpha.