To sell or not to sell?

Late Friday last week, little known Pinehill Pacific Bhd (formerly known as Multi Vest Resources Bhd, which by the way was formerly known as Best World Land Bhd) surprised the market with the announcement that it was parting with nearly 9,000 acres of landbank and related plantation assets held via three subsidiary companies to United Plantations Bhd (UP) for a whopping sum of RM413.6mil.

UP is in actual fact paying approximately 10.9% premium to the total market value of the assets acquired. What was interesting is that Pinehill Pacific (PP) is a smallish plantation based company with a market capitalisation of just under RM21mil prior to the announcement and hence, the deal itself was close to 20 times its equity market value.

Looking into the PP announcement, the sale will result in the company’s total shareholders’ funds rising by approximately RM150mil or RM1.00 per share while its earnings for the year will improve by RM87mil or by about RM0.58 per share. PP intends to utilise the proceeds from the sale by paying off the borrowings as well as creditors of the plantation companies it is selling to UP amounting to RM236.5mil. This effectively means that UP is getting the plantation assets on a clean basis and without any debts or outstanding payments to be assumed. PP is only expected to utilise some RM70mil from the sale proceeds for its Indonesian plantations venture and another RM75mil left in its kitty as working capital.

The plantation asset sale basically is a windfall for PP as it enables the company to clean up its balance sheet. PP’s last reported fourth quarter results ended June 30 showed the company’s net asset per share stood at RM0.60 and hence the sale will result in its net assets rising to RM1.60 per share on a proforma basis. Thus, the rally that we saw last Friday and into early part of this week was perhaps a natural reaction to the proposed disposal.

PP is not the only plantation company that has embarked on a disposal route to boost its fortunes as early this year we also saw Kretam Holdings taking a similar route by proposing to sell its assets to Hap Seng Plantations Holdings. However, that deal actually did not materialise for reasons given by the company.

In a current market situation where crude palm oil (CPO) prices are seen on the low end of its price cycle, sale or merger and acquisition involving plantation assets are likely to occur more often, given that the smallish players may not have the muscle to pull through during the down cycle of CPO prices as we see more and more plantation companies reporting quarterly losses. Even United Malacca Bhd was not spared as its first quarter (Q1) results for period ended 31 July 2018 slipped into a net loss of RM18.5 million. The depressed CPO prices is made worse by the rising stockpile in both Indonesia and Malaysia. Based on recent survey by Reuters, analyst expect the total stockpile to rise to as high as 7.8 million tonnes by October or November this year.

We all know that most property companies in the market trade well below their respective net assets per share but a look at the latest quarterly results among the 43 listed plantation companies showed that a significant number of them also trade at below their respective net assets. To be exact, only 15 out of the 43 companies or about 35% trade above the threshold of net asset per share. These are mainly large capitalised companies with market capitalisation of in excess of RM1bil. Out of the other 28 companies that trade below the net asset per share, 12 are presently trading at a price to net asset value per share of even less than 0.5 times. Clearly, these companies must be motivated to look into their plantation assets and if the assets do have significant value to be sold, these companies will see a significant increase in fortunes, especially in terms of cash holdings.

Out of the 12 companies that trade 0.5 times or less their respective net asset value, seven actually are in net cash position and hence chances of them embarking on an asset sale is lower unless the price to be paid by a potential acquirer is well above market value.

Of the remaining five companies, except for TH Plantations which reported positive earnings to-date for 2018, the other four, Jaya Tiasa Holdings, TDM, Harn Len Corporation (HLC) and Kwantas Corporation reported net losses year to-date. Among the five, TH Plantations has the highest net gearing of almost 87% while the other four have net gearing ratios of between 30% and 53%. Despite the high gearing level, TH Plantations is unlikely to embark on a disposal journey as it has the financial muscle to continue to expand given its strong shareholding from Tabung Haji, which owns some 74% of the plantation company. Jaya Tiasa too is not expected to be in the market to dispose of its assets as it sees the plantation sector as a way to diversify away its business from timber-related activities while TDM on the other hand, although has a relatively high gearing, has taken steps to reduced its borrowings. The fourth, Kwantas, has a reasonable net gearing level of about 30% and manageable.

HLC is seen as an interesting candidate for a potential asset sale as its latest quarterly results prompted its auditors to raise a limited review report as the company’s current liabilities exceeded current assets by RM104.6mil. Trading at just 0.35x its net asset, HLC has total net debt of about RM127mil or a net gearing of 42%. It has oil palm estates in Pahang and Sarawak with total planted area of about 13,184 hectares. Should it embark on a journey to dispose its plantation assets or are there suitors for its assets, as how we saw PP doing so last week? That is left to be seen and for the company’s board to decide on its next course of action.

The above is not exhaustive, as among the seven companies that presently trade below 0.5 times net asset value and are in net cash position, they too have some strategic landbanks. This include companies like Inch Kenneth with 202ha in Semenyih and Negri Sembilan Oil Palms with about 7,173ha. Again, the analysis is only on companies that are trading below 0.5 times net asset value, and that too if at all they are in the market to dispose. After all, as in any property transaction, it is always a case of willing-buyer, willing-seller approach when it comes to large transactions involving huge tracts of landbank.