Planters root­ing for M&As

Big com­pa­nies’ ap­petite for oil palm brown­field is likely to be main­tained this year

The Star Malaysia - StarBiz - - Front Page - By HANIM ADNAN [email protected]­

A lot of big play­ers are cash-strapped and many will be fo­cus­ing on con­sol­i­da­tion this year. Datuk Mo­hamad Nageeb Ah­mad Ab­dul Wa­hab

PE­TAL­ING JAYA: The ap­petite for oil palm brown­field in Malaysia among big planters is ex­pected to sus­tain this year with merg­ers and ac­qui­si­tions (M&As) in the off­ing.

In­dus­try ex­perts and an­a­lysts pointed out that the ban on new oil palm land ex­pan­sion, ris­ing cost of pro­duc­tion (COP), weak crude palm oil (CPO) prices and lack of in­ter­est in green­field ac­qui­si­tion could trig­ger more M&A ac­tiv­i­ties this year com­pared with 2018.

Plan­ta­tion com­pa­nies an­nounced com­bined deals es­ti­mated at RM1.24bil in Malaysia last year and barely into 2019, a new deal worth RM175mil has been an­nounced.

No­table M&As in 2018 in­cluded United Plan­ta­tions Bhd’s ac­qui­si­tion of es­tates in Teluk In­tan, Perak for RM414mil or RM120,336 per planted ha from Pine­hill Pa­cific Bhd, and Boustead Plan­ta­tions Bhd’s dis­posal of its 138.9ha land in Pe­nang to SP Se­tia Bhd, which fetched an even higher val­u­a­tion of RM979,508 per ha.

In­ter­est­ingly, poul­try-based Huat Lai Group, which was delisted in 2017, has of­fered to buy United Malacca Bhd’s plan­ta­tion es­tates in Ne­gri Sem­bi­lan and Me­laka for RM175mil cash, or equiv­a­lent to about RM171,533 per ha this year.

United Malacca chief ex­ec­u­tive of­fi­cer Peter Ben­jamin told StarBiz there would be a big pref­er­ence for brown­field among big plan­ta­tion com­pa­nies, go­ing for­ward, es­pe­cially with the ban on new oil palm land ex­pan­sion in Malaysia as well as the halt on new per­mits for oil palm plan­ta­tions in In­done­sia.

For smaller planters, many would not be able to cope with the ris­ing COP, said one in­dus­try ex­pert.

“For start-ups, their COP could be as high as RM2,000 per tonne of CPO, es­pe­cially due to their young palm trees. Hence, smaller planters might want to let go of their brown­field es­tates,” he said.

On the other hand, Malaysian Palm Oil As­so­ci­a­tion CEO Datuk Mo­hamad Nageeb Ah­mad Ab­dul Wa­hab ex­pected in­creas­ing M&As among planters this year.

“A lot of big play­ers are cash­strapped and many will be fo­cus­ing on con­sol­i­da­tion this year, un­less there is a huge bar­gain (for brown­field land),” he pointed out.

Mean­while, May­bank IB Re­search said in its lat­est re­port that “there is a di­ver­gence be­tween phys­i­cally trans­acted es­tates and M&A prices and the eq­uity share prices, whereby a num­ber of plan­ta­tion stocks are still trad­ing at or be­low their re­place­ment costs.

“This may fuel more M&A ac­tiv­i­ties in 2019.

“The long funds should take the op­por­tu­nity to ac­cu­mu­late bombed­out, small mid-cap stocks. Those that are trad­ing near or be­low their 2009 global fi­nan­cial cri­sis trough price-to-book val­ues (PBVs) in­clude Sarawak Oil Palms Bhd, Ta Ann Hold­ings Bhd and TH Plan­ta­tions Bhd,” added the re­search unit.

De­spite the re­cent weak CPO prices, May­bank IB Re­search said the trans­acted prices for es­tates and M&As con­tinue to chart new highs. In 2018, United Plan­ta­tions of­fered to buy es­tates in Perak for RM120,000 per ha, while in Sabah, es­tates were of­fered at RM79,000RM99,700 per ha.

On Jan 3, United Malacca pro­posed to sell its Ne­gri Sem­bi­lan and Me­laka es­tates for RM172,000 per ha to a poul­try com­pany.

“On the flip side, small to mid­caps are only trad­ing at an im­plied en­ter­prise value per ha of RM26,000RM36,000, which is at or be­low re­place­ment costs.

“There is an ob­vi­ous dis­con­nect be­tween phys­i­cal prices and eq­uity stock prices; this val­u­a­tion gap will have to nar­row,” it added.

May­bank IB Re­search also said pro­longed low eq­uity prices would likely tempt ma­jor share­hold­ers or cor­po­rate raiders to seek out good deals.

“Even with­out those, this is still an op­por­tune time for long funds to ac­cu­mu­late on bombed-out, small­cap stocks, es­pe­cially those trad­ing near or be­low 2009 global fi­nan­cial cri­sis (GFC) trough val­u­a­tions.”

For stocks un­der its cov­er­age, May­bank IB Re­search has a “buy” call on Sarawak Oil Palms and Ta Ann Hold­ings, as both stocks are still trad­ing near or be­low their 2009 GFC trough val­u­a­tions de­spite the re­cent share price re­cov­ery, sug­gest­ing fur­ther up­side.

“How­ever, in the im­me­di­ate term, in­vestors should ex­pect some volatil­ity in the first half of 2019 and be mind­ful that the sec­tor is likely to re­port a set of weak fourth-quar­ter 2018 (4Q18) re­sults in Fe­bru­ary, as the CPO spot price has been weak, hav­ing av­er­aged just RM1,920 per tonne in 4Q18 ver­sus RM2,189 per tonne in 3Q18 and RM2,606 per tonne in 4Q17.

“Fur­ther­more, at RM1,920 per tonne, it is be­low the COP of many lo­cal planters,” it said.

Hav­ing said that, the re­search unit ex­pected 2019 to be a year of re­cov­ery for the CPO price.

In the past two decades, there have been two oc­ca­sions when the CPO price traded be­low the in­dus­try’s COP in 2000-2001 and 20082009 – and this was re­peated in the sec­ond-half of 2018.

“His­tory has shown that low CPO spot prices usu­ally last for about six months be­fore price re­cov­ery sets in, as pro­duc­ers can­not af­ford to con­tin­u­ously sell be­low cost over an ex­tended pe­riod of time.

“In this cur­rent cy­cle of price weak­ness, we are al­ready into the fourth month of low CPO spot prices, this could po­ten­tially ex­tend for one to two more months.

“If his­tory is any good as a guide, a mean­ing­ful price re­cov­ery could set in, likely in the sec­ond quar­ter of 2019,” added the re­search unit.

Source: Bursa, May­bank-KE

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