All eyes on IJM Group
This comes after IJM Plantations emerges as takeover target
THE IJM Group came under the spotlight this week after news that its oil palm plantation company – IJM Plantations Bhd – has emerged as a takeover target.
Talk is that there is more than one suitor vying for the company, which has matured plantation hectarage in Sabah and Indonesia.
IJM Plantations is said to be a takeover target of the big boys of the industry, namely, IOI Corp Bhd, Hap Seng Plantations Holdings Bhd and Kuala Lumpur Kepong Bhd (KLK).
Industry experts say there is increased appetite for local plantation companies to acquire existing oil palm plantations to expand their hectarage instead of greenfields.
“The current preference for brownfields among big plantation companies is mostly due to major changes in the global oil palm sustainability requirement scene,” says an analyst.
KUB Malaysia Bhd had earlier completed the acquisition of 1,534 ha of brownfield oil palm plantation land in Sg Kinabatangan, Sabah, for RM100.5mil.
Analysts reckon that IJM Plantations’ takeover could fetch between RM2.1bil and RM3.1bil.
On the face of it, IOI Corp seems to be the perfect suitor for IJM Plantations as it is sitting on a strong cash pile of RM3.7bil after selling off its 70% stake in refinery arm, IOI Loders, to United States-listed Bunge Ltd last year.
Hap Seng Plantations and KLK, meanwhile, have smaller coffers of RM65mil and RM1.1bil cash, respectively.
In terms of plantation hectarage size, IOI Corp is more than three times the size of IJM Plantations with 217,968 ha of oil palm estates spanning across Malaysia and Indonesia, of which 174,396 ha have been planted with oil palm.
Should the acquisition go through, IOI Corp would be the third-biggest oil palm plantation company in Malaysia after Sime Darby Plantation Bhd and FGV Holdings Bhd.
PublicInvest Research says in a report that the acquisition of IJM Plantations will springboard the acquirer’s planted landbank size by leaps and bounds.
If the acquisition were to take place, the offer price for IJM Plantations could be in the range of RM2.1bil to RM3.1bil, it says.
“The targeted company, which has a market capitalisation of RM2bil, is easier for IOI Corp to swallow than Hap Seng Plantations,” the research report adds.
The lure of IJM Plantations
IJM Plantations is the seventh-largest Malaysian plantation company with a total planted area of 60,981 ha in Sabah and Indonesia. It is 55% owned by IJM Corp.
It had a tree-age profile of 6.8 years on average as at March 31 due to the relatively young palm profile of its Indonesian operations.
The average tree-age profile provides strong fresh fruit bunch (FFB) output growth prospects for the buyer of IJM Plantations.
IJM Plantations has already deployed almost RM175mil in the past two years in capital expenditure (capex) for its Indonesian operations. “The company is expected to see lower expenditure in capex due to fewer immature areas and its tree-age profile,” an analyst says.
However, the weakness in crude palm oil (CPO) prices is unlikely to see an immediate boost for the acquirer in the near term.
IJM Plantations has a solid balance sheet with RM206mil cash and borrowings of RM733.1mil net gearing level of 31.8%, while its net book value stands at RM1.6bil.
Affin Hwang has lowered its 2018 CPO assumption to RM2,350 per tonne, down from the previous RM2,500 per tonne.
“We do expect CPO prices to trade higher than the current levels of RM2,250 per tonne, as we think demand will pick up in the second half, underpinned by exports and domestic consumption for the food and energy industries,” it said in a report yesterday.
PublicInvest Research says IJM Plantations’ major shareholders’ intention to dispose of its 55% stake was because the shareholders believe that the plantation business has not been valued “fairly”.
“We think that the potential acquisition is unlikely to be earnings accretive in the near term, given the current poor CPO price performance.
“Pending further updates on the potential acquisition, we maintain our target price of RM4.65 with a ‘neutral’ call,” the research house says.
“Assuming we attach an enterprise value (EV) to the planted area of RM40,000 for its 35,978ha planted area in Indonesia and EV/ planted area of RM70,000 for its 25,002ha in Malaysia, it is worth a whopping RM3.1bil, which is 47% higher than the recent closing market capitalisation of RM2.1bil,” it adds.
However, the brokerage notes that given the current weak CPO price sentiment, there could be a significant discount depending on the bargaining power of IJM Corp and the interested parties.
IJM Corp to focus on core business
For IJM Corp, its main profit contribution comes from the construction, infrastructure and property business, while plantation contributes about 14% of its revenue.
Its plantation business has been a drag on its valuation compared to its peers. For instance, Affin Hwang Capital recently reduced its realised net asset value per share estimate in IJM Corp to RM2.72 from RM2.82 to reflect lower valuations for its plantation division.
IJM Corp closed unchanged yesterday at RM1.99 a share.
Affin Hwang Capital says that although IJM is currently facing challenges in its construction business, especially with the ongoing review of infrastructure projects, the firm is expected to thrive under the new administration of Pakatan Harapan.
“We believe IJM Corp will thrive under the new regime, as the new Works Minister says future government contracts will be awarded on an open tender basis, levelling the playing field for IJM Corp since it has won nearly all its ongoing projects via open tender,” it said in a report last month.
The research house points out that IJM Corp is bidding for three building projects in the Klang Valley and is targeting to secure at least RM1bil worth of new contracts in 2019.
In terms of orderbook, the company has about RM9.4bil, which Affin Hwang says is equivalent to four times the financial year 2018 (FY18) construction revenue and will sustain its construction earnings growth.
As such, selling its plantation business would free up some cash for IJM Corp to deploy to its fat orderbook.
Affin Hwang has cut its forecast on IJM Corp earnings by about 6%-8% from FY19 to FY21 to reflect lower plantation and port earnings.
Notably, IJM Corp is scheduled to start operating the Kuantan Port new deep water terminal Phase 1A next month, and Phase 1B in June 2019.
Aside from ports, the company has numerous highway concession assets, namely, the New Pantai Expressway, the Besraya Expressway, Lebuhraya KajangSeremban and the West Coast Expressway.