KLK’s Equatorial Palm Oil Obtains Five-Year Tax Holiday – Palm Oil Sector Hides Stranded Assets, says ZSL

KLK’s Equatorial Palm Oil Obtains Five-Year Tax Holiday – Palm Oil Sector Hides Stranded Assets, says ZSL
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KLK’s Equatorial Palm Oil Obtains Five-Year Tax Holiday

As written for Chain Reaction Research, Kuala Lumpur Kepong’s (KLK) Equatorial Palm Oil PLC gained a five-year extension to its tax holiday in Liberia last week. Equatorial Palm Oil trades as PAL the AIM market of the London Stock Exchange.

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PAL’s tax holiday covers its Palm Bay and Butaw palm oil concessions in Liberia. It was initially applied for seven years. Liberia has extended the tax holiday because development is slower than planned.

Last September, PAL’s joint venture Liberian Palm Developments disclosed a $30 million loan from KLK Agro Plantations (KLK Agro). Proceeds will fund the next building phase of a 60-metric ton palm oil mill on the Palm Bay Estate, Liberia. Palm oil from this new mill will be exported by the Equatorial Palm Oil PLC subsidiary LIBINC Oil Palm Inc. facility at the port of Buchanan.

The $30 million loan is due January 25, 2020 at a rate of three-month LIBOR +5 percent. This comes on top of to a previous $20.5 million loan from KLK Agro to Liberian Palm Developments that has been fully spent. Since landing the new loan last September, PAL’s share price increased from £1.88 to £3.88.

PAL’s total comprehensive income for FY2015 was $-1.484 million. For FY2014 it was $-1.055 million.

The Roundtable on Sustainable Palm Oil (RSPO) reports that PAL, the Sustainable Development Institute and Liberian communities have signed a Memorandum of Understanding on land conflict that involves over 1,570 hectares (ha) of new plantings in Liberia. Since 2011, PAL has planted 7,300 ha in Liberia.

PAL has pledged to follow High Carbon Stock guidelines and has engaged The Forest Trust (TFT) to assess new plantings.

The key risks facing PAL are:

  • Commodity Pricing Risk: As a plantation company, PAL is exposed to changes in the price of crude palm oil.
  • Foreign Exchange Risk: Given PAL’s majority shareholder based in Malaysia, with KLK’s shares quoted in Malaysian ringgit and PAL’s 2018 sales derived in US dollars, it has foreign exchange risks.
  • Production Risks: PAL faces production risk from managing community relations in its effort to obtain FPIC, the yield and growth of its planted land, extraction rate, refining costs and transport costs.

Investors will want to be aware of these risks given PAL’s negative cash flows and debt burden.

Palm Oil Sector Hides Stranded Assets, says ZSL

The Zoological Society of London (ZSL) reports that palm oil producers often fail to publicly disclose their total land holdings. This may expose investors to hidden risks.

ZSL profiled 50 companies in “Hidden Land, Hidden Risks”. ZSL found that more than half of these companies have released inconsistent landbank figures between their annual reports, sustainability reports or corporate websites.

The report states that:

  • 70 percent of the firms fail to disclose areas not yet planted with oil palm.
  • 56 percent of the firms report inconsistent landbank figures.

These actions may mask material stranded land risk. This may possibly hide vast areas of land with environmental and social risks if developed in the future. This would break both their buyers’ No Deforestation, No Peat, No Exploitation (NDPE) policies and government rules.

78 percent of the firms assessed in the report are RSPO members. RSPO member companies agree to disclose their land holdings in their Annual Communications of Progress (ACOP) reports. ZSL’s report finds that many of the companies have failed to keep this promise.

As more investors seek transparency on material risks within palm oil supply chains, it is important that companies provide regular and accurate honest reports. This includes accurate reporting on land under management, how they define their landbank and its uses, concession ownership dates, investments and executives. These actions support informed decision making for investors, financiers and purchasers alike.

Updated on

Gabriel Thoumi, CFA, FRM works as Director Capital Markets at Climate Advisers where he manages global financial analytics focusing on mitigating systemic climate risk while advising on “greening” capital markets. He has 18 years of experience managing and deploying frameworks to improve global capital markets sustainability through risk mitigation and return enhancement. Previously, for Calvert Investment Management, he valued global equity, index, and fixed income portfolios and their component positions in the utilities, energy, materials, chemicals, and financial sectors. He worked on quantitative index construction and asset allocation strategies. He engaged Fortune 500 CEOs on approaches to mitigating climate risk using financial risk management tools. He led initiatives to improve financial accounting of exchange-listed products and incorporated natural capital into financial tools. He has also worked at Morgan Stanley's carbon offset company, Wells Fargo Capital Management, and American Express. He is an adjunct at John Hopkins University.
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