June 4, 2021

ESG: Prosper thy neighbour

Targets to be carbon neutral by 2030

BAL can pride itself as a sustainability champion. It pledged to make its operations carbon neutral by 2030.BAL has also initiated many community projects to help improve the income and livelihoods of surrounding communities. Overall, its ESG credentials appear to be relatively good but its wide geographical land concession of 234,000 ha with over 30,000 workers exposes BAL to multiple ESG risks. We maintain our BUY and TP of SGD0.65 on 12x FY21E PER peg, its 5-yr mean. BAL trades at single-digit PER with attractive net dividend yields of above 4%.

43% of total certifiable area RSPO certified

BAL has 56,433 ha or 43% of its total certifiable area RSPO certified. In FY20, its annual production of RSPO CSPO was 236,962t. Due to pandemic-related travel restrictions, it has deferred its time-bound plan to complete certification of all its mills by 2022 (previously 2020) or one year after obtaining HGUs, and for all plasma smallholders by 2024.

Set aside 39,310 ha or 17% of area for conservation

BAL has adopted a Sustainability policy of No Deforestation, No Peat, No Exploitation in 2015. It has resolved all past land disputes, deforestation and forest fire allegations amicably. Nonetheless, there is still an ongoing land dispute via RSPO complaints system pending resolution which relates to a 2012 case that was reopened in 2017 (after being closed in 2015).BAL has also stepped up its environmental conservation efforts by setting aside 39,310 ha (or 17% of land bank) as conservation area. And it targets a 30% reduction in GHG intensity by 2030 using 2016 as baseline.

Community welfare at its heart

Poverty and lack of awareness among rural community are common reasons in Indonesia for incidences of illegal deforestation and fires in the past. Cognisant of these, BAL has initiated many community projects aimed to reduce deforestation and minimise any fire use for community land clearing (as allowed by provincial regulations). Its CSR expenditure has averaged 2.3% of past 3 year’s profits. Despite its environmental conservation and community development efforts, BAL remains one of the lowest cost producers in the region.

Business Model & Industry Issues

§BAL is a pure upstream oil palm player with 234,000 ha of land concession (about ~3.2x the size of Singapore) in Indonesia of which 187,917 ha are planted with oil palm. Of these, 132,816 ha are nucleus planted area (ie. owned by BAL). The remaining 55,101 ha are plasma planted area or 29.3% of its total planted area(which is 10% over the government’s mandatory level). The plasma area helps provide income for local communities, including local contractors, suppliers and other spill over businesses.

§Its geographical spread across Central Kalimantan, West Kalimantan and Riau with over 30,000 workers naturally exposes BAL to multiple ESG risks. Key risks include natural disasters, deforestation, labour practises, supply chain monitoring, and governance and corruption.

§BAL is one of the leaders in oil palm sustainability in Indonesia. Besides having 43% of its total certifiable area RSPO certified, it has also initiated many community projects surrounding its concession areas, providing community groups with alternative income and livelihoods.

Material E issues

§BAL has adopted a Sustainability policy of No Deforestation, No Peat, No Exploitation (NDPE) in 2015.

§8 of its 14 mills and 56,433 ha or 43% of total certifiable area are RSPO certified in FY20(which included two groups of plasma smallholders area measuring 1,889 ha in total).

§In FY20, it achieved a 42% increase in RSPO certified volume (of 236,962t) compared to FY18.§98.8% of all FFB is traceable to plantation.

§BAL has set aside 39,310 ha (or 16.8% of its total landbank of 234,000 ha) as conservation area comprising HCV (25,885 ha), HCS (11,517 ha), Peat (1,540 ha) and Others (368 ha).

§BAL has pledged to make its operations carbon neutral by 2030.It targets a 30% reduction in GHG intensity by 2030 using 2016 as a baseline. In 2020, its GHG emissions intensity was 1.56MT CO e/MT CPO, 4% lower than 2016.

§It has set Triple Zero Target Programme by 2025, with annual stepwise reduction targets towards zero fatalities, zero environmental incidents and zero fires. Most of the fires recorded at the concession areas were caused by extreme weather events despite proactive fire prevention measures.

Material S issues

§FY20’s total CSR expenditure of IDR24.14b approximates 2.1% of its headline profits(3-yr avg: 2.3%), of which 79% was spent on schools and childcare, 9% on social & cultural activities, 4% on local business development, and 4% on health.

§Bumitama Foundation provides quality education to 5,300 children through 38 internal schools. It also runs 124 childcare centres caring for over 2,000 children. About 60% of students are children of BAL employees and the rest from nearby communities.

§It has invested heavily in fire prevention and educating smallholders.

§BAL began two 35-year social forestry programmes with communities in West Kalimantan designed to bring long-term benefits to the area it operates.

§Since 2018, two RSPO complaints cases have been closed, and one is still ongoing (which relates to a case reopened in 2017 after initially being closed in 2015).

Key G metrics and issues

§The Board comprises six members: three independent directors (ID; 50%), one non-executive director (NED) and two executive directors (ED). It comprises three Singaporeans, two Indonesians, and one Malaysian member, and reflects the diverse professional and educational backgrounds.

§The Lim family, being the major shareholder which collectively owns 52.3%-equity stake in BAL, is represented by two EDs. One of them, Mr Lim Gunawan Hariyanto, is the CEO and Chairman of the Board. Besides the 2 EDs, there are two other immediate family members whose remuneration exceeded SGD100,000 during FY20.

§To ensure sufficient oversight, BAL has appointed an independent lead director. And the Board committees of the Audit Committee, Remuneration Committee, Nominating Committee, and Conflicts Resolution Committees are each chaired by an ID and all members are IDs. None of the IDs has served more than 5 years on the Board.

§The Lee family, being the 2nd major shareholder with a 32.1%-equity stake, is represented by one NED on the Board.

§The Board provides management oversight and leads the development of corporate strategies while being responsible for ensuring that BAL’s corporate governance practices are aligned with the Singapore Code of Corporate Governance.

§The Board oversees the Sustainability Policy strategy, and the CEO champions its sustainability principles. BAL’s senior management team handles oversight and the implementation of its Sustainability Policy and oversees all stakeholder consultation on sustainability matters.

§The Chairman/ CEO’s total remuneration package for FY20 was 2.1% of core net profits (3-yr avg: 2.8%).§There is currently one female board member (or 17% of Board composition).

§BAL has a zero tolerance policy on gender discrimination and sexual harassment. Women make up 28% of its workforce.

§Ernst & Young (EY) has been its external auditor since listing in 2012. As the present engagement partner has been the same the past 5 years, we expect a new EY audit partner for FY21.

§There have been no questionable related-party transactions for the recent past five years.

Risk statement

There are several risk factors for our earnings estimates, price target, and rating for Bumitama Agri (BAL). Key risks to the palm oil sector and BAL are: (i) weather anomalies resulting in poorer-than-expected output growth, (ii) lower-than-expected CPO price achieved, (iii) negative policies imposed by import countries, (iv) unfriendly policies imposed by the Indonesian government on upstream planters, (v) sharply lower crude oil prices which makes palm biodiesel demand not viable, and (vi) weaker competing oil prices (like soybean and rapeseed.

BUY by Maybank Kim Eng Securities Research. Share price closed at $0.46.