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Saturday, February 15, 2014

Cash-rich plantation firms on the prowl

Source: http://www.thestar.com.my/Business/Business-News/2014/02/15/Cashrich-plantation-firms-on-the-prowl-Small-companies-become-the-target-of-larger-companies/

THE big plantation companies in the country are flushed with cash.
Sitting on massive cash reserves of over RM20bil as at the end of last year, the top 40-odd local planters have, over the decades, reaped the benefits of high margins from their sizeable plantations, along with a lucrative refining business. And they are looking to spend all that money on growing their plantations.
While shareholders may applaud the capacity of these plantation companies to sustain their profit margins and pay out generous dividends, industry expert MR Chandran says the cash reserves sitting idly in the coffers of these companies need to be reinvested strategically for future growth.
He expects many cash-rich plantation companies to continue expanding by way of mergers and acquisitions (M&As) in Malaysia and overseas this year, besides replanting to address the high number of aged palm trees and diversifying into more oil palm downstream activities, including biodiesel production.
When contacted by StarBizWeek, top plantation player Kuala Lumpur Kepong Bhd (KLK) and IJM Plantations Bhd (IJMP) agree that land bank acquisition still tops the agenda of oil palm planters this year.
 KLK executive director and group plantations director Roy Lim says KLK is always on the lookout for possible land bank expansion whether “it is in Malaysia or overseas”.
KLK is among Malaysia’s five largest plantation companies, with a land bank of close to 250,000ha in Peninsular Malaysia, Sabah and Indonesia.
The company’s latest development is its maiden venture into West Africa via stake acquisitions in two oil palm companies in Liberia.
IJMP managing director and chief executive officer Joseph Tek Choon Yee, meanwhile, says the mid-sized Sabah-based planter is on target to double its land bank.
“The company will continue to be on the lookout for more land which offer opportunities to synergise with its present operations,” he adds.
Currently, IJMP has over 80,000ha, mostly located in the Sandakan and Sugut region, as well as East Kalimantan in Indonesia.

Takeover targets
When the price of crude palm oil (CPO) fell below RM2,200 per tonne last year, many small Sabah-based plantation companies became takeover targets of the big boys of the industry.
The most prominent acquisitions in the second half of 2013 include the RM2.2bil acquisition of Pontian United Plantations Bhd by cash-rich Felda Global Ventures Holdings Bhd (FGV). This was followed by Boustead Holdings Bhd’s RM184.6mil acquisition of Uniglobal Sdn Bhd in September and IOI Corp Bhd buying over Unico Desa Plantations Bhd for RM1.2bil in October.
The acquisition price for Sabah plantation land ranged between RM73,416 per ha and RM76,603 per ha.
 
However, Chandran says that last year’s land bank price valuations in Sabah will no longer be valid this year, especially with “the price of CPO currently soaring above the RM2,600-per-tonne level as opposed to last year’s average price of RM2,347 per tonne”.
So far this year, several plantations in Sabah with land sizes ranging between 10,000ha and 15,000ha, and palm oil mills requiring infrastructure and anciliary facility, have already been transacted at much higher prices, in the range of between RM75,000 per ha and RM83,000 per ha.
In Peninsular Malaysia, the value for similar-sized oil palm estates is around 20% to 40% higher, depending on the location.
As for plantation land in Indonesia, Chandran says the total cost for established plantations with mills can vary between US$14,000 and US$15,000 per ha. Costs have also risen for agricultural leasehold land from US$1,400 to US$1,800 per ha in some provinces.
Land costs, especially in Kalimantan, have appreciated considerably over the past five years.
Credit Suisse in its latest Asia Strategy Report supports the idea that M&As in the plantation sector are set to accelerate in 2014.
It says large Malaysian plantation companies such as Sime Darby Bhd, KLK, IOI and FGV could be potential acquirers of small-cap plantation stocks or private plantation companies.
While there have been some M&As involving plantation companies looking to exit, transactions involving listed plantation companies have been few and far between, as most want to remain in control.
“Acquisitions of non-listed plantation companies will be more prevalent. Upstream plantation companies are also taking the opportunity to acquire downstream businesses to be integrated,” adds the research unit.
On the other hand, Kenanga Research regional analyst Alan Lim Seong Chunexpects M&As in the plantation sector, especially in terms of acquiring smaller oil palm plantation companies, to cease this year.
“I believe the M&A play is already over and done with. When the CPO price fell to RM2,200 per tonne, many non-efficient planters with high debts started to sell their estates last year.
“The situation has changed since then, as the price of CPO is currently trading above RM2,600 per tonne.
“What more with the CPO price expected to hit RM3,000 per tonne within the next three months. No plantation company in its right mind would want to sell its estates by then,” adds Lim.
 On replanting mode
In Malaysia, there is a serious need to undertake replanting, given the high percentage of aged palm trees.
For KLK, Lim says: “Our replanting expenditure for financial year 2013 (FY13) was in the range of RM70mil. We do not foresee any material change in the amount for FY14.”
Tek of IJMP points out that the company has adopted a pragmatic replanting programme. It replants 4% of its plantations a year.
Generally, many big plantation companies in Malaysia strictly adhere to the replanting policy of between 3% and 5% per year of their total hectarage to ensure a good balance between young and mature palm trees.

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