IT wasn’t the best of times at Sime Darby Group when Tan Sri Mohd Bakke Salleh was parachuted in as president and group CEO on July 15, 2010.

The group had been going through a period of turbulence since late 2009, when news began to surface that all was not well in its Energy and Utilities Division.

By the middle of 2010, things had come to a head; the then president and group CEO Datuk Seri Ahmad Zubir Murshid was asked to go on leave. By then, the E&U division was deeply in the red. In FY2009/10, this division reported an operating loss of RM1.8 billion, according to Sime Darby’s 2010 annual report. At the group level, FY2010 net profit shrank to RM726.8 million from RM2.28 billion in FY2009.

It was during these troubled times that Bakke took the helm and his immediate mandate was to put the house in order. This meant making many hard and unpopular decisions that would not sit well with some quarters.

According to insiders, Bakke braved the elements and did what needed to be done, including streamlining group operations and disposing of the E&U division, which had been with the group for 25 years.

Another daunting task was to drive the group’s plans through following the mega-merger that resulted in Sime Darby becoming the world’s largest plantation company in 2007. The task was made all the more difficult because almost all the key people involved in the 2007 merger had left.

All that is now water under the bridge. Today, Sime Darby is back on an even keel.

There is no let-up for Bakke, though. He is once again being challenged, this time by an operating environment that is roiled by falling commodity prices and a slower-than-expected recovery in global growth.

Indeed, going by the earnings performance in the first half of FY2015, Sime Darby is unlikely to meet the full-year forecast of RM2.5 billion.

The Edge sat down with Bakke for an interview when he was in Port Moresby, Papua New Guinea, to attend an event to mark the completion of Sime Darby’s acquisition of New Britain Palm Oil Ltd (NBPOL) on March 2.

This is his first media interview on his five-year journey, the challenges and what more is to come since taking up the reins of the company in 2010.

“When I first joined Sime Darby, the priority then was to put the group on a much stronger footing. Having done that, we’ve put in place a five-year strategy to realise the full potential of our core businesses and achieve leadership positions,” says Bakke.

How much traction has that gained?

“We’re on the right track, but the global environment has been challenging, and we’ve had to refine our business strategies to address the consolidation of the mining industry in Australia, credit tightening and stricter regulations in the motor and property businesses (in Malaysia), for example,” says Bakke.

What have been his biggest challenges in the last five years?

“There have been many but the main one would be the weak commodity prices. Our two biggest divisions — plantations and industrial — are facing lower CPO (crude palm oil) and coal prices ... another key challenge is identifying the right opportunities when times are difficult.”

Even so, Bakke takes such challenges in his stride.

“Challenges will always be there in a business environment that is dynamic. Whenever something crops up, we will have to work out a response or solution to the problem. That’s what business is all about.”

The following is an excerpt of the interview.

The Edge: What more, in your view, could be done to unlock value for Sime Darby’s shareholders?
Tan Sri Mohd Bakke Salleh: Sime Darby is always evaluating opportunities to create more value for shareholders but we are also mindful of doing them at the right time. We will continue to improve our operational efficiencies and pursue strategic portfolio growth. The latter could be anything from acquisitions and initial public offerings to strategic alliances. We could not achieve anything of the above without people. Thus, we have in place our talent development and human capital management to ensure we have the best personnel to execute the strategies.

Sime Darby’s ops were rationalised into five divisions under your stewardship. Some of these units have potential for listing. You have talked about the motor sector IPO. What about the property division, which has come under a lot of speculation pertaining to a possible merger with other PNB (Permodalan Nasional Bhd) property arms?
Our focus is to realise the full potential of our property business. We are working towards diversifying our earnings base by developing commercial properties with recurring income potential and in terms of geography. As for strategic alliances, the Battersea project is a good example of the opportunities that are out there. As for plans that are being reported in the media, we cannot comment on speculation.

What have been the biggest challenges for you in the last five years?
There have been many but the main one would be weak commodity prices. Our two biggest divisions — plantation and industrial — are facing lower CPO and coal prices respectively. Having said that, we expanded to Liberia in 2009 and acquired Bucyrus in 2011, which will position us well when the markets turn around. Another key challenge is identifying the right opportunities when times are difficult.

Going by your latest financial results, the downturn in commodity prices and a tough economic environment are beginning to bite. How are you strategising to ride out this period?
We have been sharing this with the market. Today, we have implemented a number of measures to vigorously manage our costs, even our capex has been reviewed and we have halved our budgeted capex from RM7.4 billion to RM3.7 billion for the year (for FY2015) (excluding the NBPOL acquisition). As for operating costs, we have identified areas where we have to reduce the expenditure and only incur expenditure if it is deemed necessary. On the productivity side and revenue, whatever measures that are humanly possible are being worked on today: increasing revenue or ensuring that we do not lose on yields. Yields are dependent on a number of factors, for example the age of the palms is important, the weather and also the human touch, the manuring programmes, the planting materials. Weather indeed is an important factor. On the human measures, it is about improving agronomic practices and competence.

One of the benefits I am looking forward to from this exercise (the acquisition of NBPOL) is the cross fertilisation of agro management practices.

Sime Darby may miss the RM2.5 billion profit KPI?
I think you guys are drawing conclusions about it. We achieved 38% of our target (for the first half) but even the KPI that we set was done based on a number of assumptions. But if the actual scenario differs from what was assumed — obviously, that will have an impact but we will try to mitigate the impact of the new scenarios with other measures towards meeting the KPI.

Are you worried about the impact of a weakening ringgit?
The weakening ringgit helped our CPO exports but it is not good for the auto business. Having said that, the good thing is that 50% of our revenue comes from overseas business.

Sime Darby’s yield trend is flat or even falling. Why?
Today, we have increased the percentage of replanting. The rule of thumb is that if you assume a 25-year age of palms cycle, it means that every year, you need to set aside 4% for replanting, but we decided to increase that, especially for Indonesia. That will also pull down our yields.

In terms of areas affected by tree stress and weather-related factors, in Indonesia, the effects are still there. Then in Malaysia, in the first six months of last year, we had dry weather. Today, we are not getting the targeted yields. As for human contribution, that is the agronomic practices. We are doing what is considered ‘best in class’ practices, in terms of loose fruit collection, making sure crop recovery is 100%, the waiting period is reduced — all these things are in place. We have implemented a system in head office that can monitor the activities of our estates. We look at the screen to see what’s happening on the ground, we have given out this gadget to our conductors, estate managers. We know what they have done for the day, on the basis of extracting the most from the use of technology. So, we still have scope for improvement but whatever is considered to be useful tools to enhance performance, we have already adopted them. And we will continue to improve on this.

When do you expect to see an upturn in yield performance?
I think by next year, when we report our next financial results, it has to be higher than what we will eventually achieve this year.

This is something being worked on all the time by getting input from agronomists and so on, changing and tweaking our practices.

Water management is another area. In estates where we are able to roll out good water management facilities, we have observed an improvement in yields. Oil palm estates live on water. To increase coverage of our water management support system for the entire group will be onerous from a cost perspective because you need to spend money to set up a watering system. It is not cheap. To get the full impact and desired effect, the estimate is RM8,000 to RM10,000 per hectare.

In the long run, there will be a significant impact on yields. These measures are being looked at, reviewed and tried on a pilot basis in a few of our estates. Ideally, water management infrastructure should be extended to all our estates but this is financially burdensome.
The other thing to improve productivity is to replant with new planting materials that will give us better yields. We have planting materials that can give us oil yields of anything between 8 and 12 tonnes per hectare ... but now we are only enjoying around five tonnes per hectare.

How long do you expect this challenging period to continue?
The CPO price today is around RM2,300. Even if it stays at around this level, we will continue to make reasonable profits. But if it firms up to RM2,400 to RM2,500, the better for us.

As for our property business, 60% to 75% of our products are below RM700,000 in terms of pricing. We have seen strong take-up rates in our recent launches, such as Nafiri 2 in Bandar Bukit Raja, Aralia in Elmina East and Azalea in Nilai Impian. We expect demand for properties to remain robust, especially among genuine buyers looking for long-term value appreciation and rental income. This is where demand is still resilient. As for the auto business, there are new challenges, like the impact of forex on CBUs (completely built-up units) and overlapping of the sales tax with GST (Goods and Services Tax).  

Once the market digests this, the motor business will continue to grow. We see that every year — there has been an increase in total industry volume, 2% growth on average. In Singapore, the outlook is improving compared with a year ago. China is the largest market in the world, we cannot ignore it, all the auto players are represented there.

At a recent conference on the outlook for CPO, a widely held view was that prices could go below RM2,000 to about RM1,800. How would this change the industry dynamics?
Palm oil is a commodity and like all other commodities, prices are cyclical. Just a few years ago, RM2,500 to RM3,000 was considered the ‘normal’ range for prices. Not that long ago, in 2008, prices touched RM4,203 but in 2001, just seven years before that, prices hit a low of RM625.

The cyclical nature of the industry is not something we are unfamiliar with. If you look at why prices move so rapidly, it comes down to basic demand and supply. Whatever the underlying causes — weather, disease, demand created by a new market like biodiesel — price is a factor of demand and supply. In the shorter term, current prices will affect higher cost, less efficient and smaller players. In the longer term, the prices will find their equilibrium, as will the industry.

Today, prices are hovering just above RM2,000. Costs, for larger players like us, range from about RM1,300 to RM1,500 a tonne. But for smaller players, costs can be higher, which means their profit margins will be squeezed. It is at times such as these that good assets can become available as those who had higher entry costs or less holding power seek to exit the industry. We have seen abandoned plantations, smallholders who have to resort to other ways of earning a living not harvesting their trees and cost-cutting measures that involve the reduction of fertiliser application. All of these will result in reduced production and you will start seeing stock levels come off within 6 to 12 months.

Furthermore, there is the additional consideration that CPO is an edible oil and a perfect substitute for other edible oils, such as soy, corn and rapeseed. When edible oil prices dip to unattractive levels, farmers of annual crops shift to other crops, as they have in the past, which will again affect demand.

Finally, there are national policies that we should also consider. Indonesia has just announced a biodiesel blend of B15. It is looking at the possibility of B20. This will mop up a lot of supply from the world’s largest exporter of the oil for domestic consumption.    

Africa was a new frontier for Sime Darby. How much traction has Liberia gained? How big a setback was the Ebola outbreak?
We believe that we’ve made considerable progress, although planting 10,000ha since 2010 is slower relative to what we’re used to in Asia. The Ebola outbreak was unfortunate because we were making strides in our refined FPIC (free, prior and informed consent) process. The good news is that new Ebola cases have dwindled and we expect to resume full operations this year. As a long-term investor, we still believe in the potential of Africa as the new frontier for oil palm.

What about Indonesia? There was talk that Sime Darby is restructuring its Indonesian assets. How much traction has the restructuring gained?
As mentioned before in our media briefings, we are still examining the options and we will make an announcement at the appropriate time.

On the acquisition of NBPOL

There is a view that given current market conditions, the price that Sime Darby paid for NBPOL was on the expensive side?
We believe we have paid a fair market price. The price expectation of a successful acquisition following the failed Kulim bid was between £6.50 and £7 per share. We paid £7.15 per share, which was at a slight premium to that price. But I think this price is acceptable, given the scarcity of suitable landbank and the high costs and risks associated with greenfield developments. We see this as a rare opportunity that should not be missed. In return for the premium, we are getting quality brownfield assets, that is ~135,000ha of landbank with ~81,500ha planted that are fully RSPO certified. Besides oil palm, NBPOL is also involved in beef, sugar and seed production. Furthermore, Sime Darby sees this acquisition as the gateway to future expansion within and outside PNG. Hence, we believe the quality of the assets justifies the price.

What is clearly visible to the market is the strength of NBPOL’s upstream business. However, for Sime Darby, the downstream business is the hidden jewel in NBPOL. It has succeeded in commanding a price premium for its sustainable palm products.
I think not every plantation player will be able to appreciate NBPOL’s strengths. Sime Darby and NBPOL’s strengths in the production of sustainable palm oil represent not only our shared business practices and beliefs but also a platform to do greater things together across the value chain.

Can you talk about Sime Darby’s plans to tap NBPOL’s strengths?
As we work towards integrating operations, there will be lots of opportunities for us to cross fertilise, in areas where we hope to generate benefits — which will have an impact on Sime Darby’s other operations. They will also benefit from our contributions. It’s a synergistic outcome — the synergy achieved by both parties.

From NBPOL’s perspective, how will it benefit?
For a start, it is going to be part of a company with a bigger balance sheet now. Future expansion will be driven by Sime Darby’s balance sheet. We are already looking at increasing the landbank and in PNG alone, we can easily increase it by 20,000ha. These are areas that have already been identified. These are greenfields that can be developed into oil palm estates. They will not be problematic as far as sustainability issues are concerned because they comply with the principles.

Why did it take Sime Darby so long to come into PNG?
We first came here in 2009 and there were subsequent visits but to secure sizeable tracts of land was a challenge. We could not find anything suitable. Other companies were not able to establish a presence here as well. Interestingly enough, way back in 2012, I sat down with Kulim’s directors to negotiate an offer to take over their block and do a GO, and they asked for £9. We backed off. Later, we found out from RHB Bank that it was keen to dispose of its shareholding after it could not increase its stake from 49% to about 65%.

When RHB contacted us, we said, fine, did all the legwork and took part in a tender exercise. Of course, when you are involved in such an exercise, it’s not easy because you have to try to read the minds of other bidders. If it is a one-on-one deal, it’s take it or leave it. But in a tender exercise, especially in the field that has other established companies with deep pockets, the tender price has to be in an attractive range. It was based on a combination of factors — looking at the financial impact on our balance sheet, how our earnings will improve and quantifying the indirect impact of the acquisition. That is the financial benefits that will accrue to us with cross fertilisation of the two companies. The (tender) price (was one) that gave us the best opportunity and a likely probability of winning the bid.

If NBPOL is good, why did Kulim sell?
I cannot answer for the company but from what little I know about the decision to sell, it could not increase its stake.

On what exchange rate is the amount that Sime Darby has to pay for NBPOL based on, given that the ringgit is weakening?
Before we made payments, we had already bought sterling forward ... the average rate was RM5.50. The rate that prevailed in June last year was around RM5.40 to RM5.45, then it came down to RM5.41 to RM5.42 and then moved up to RM5.50. Now, it is RM5.60. The moment we decided that our bid was successful, we decided that the right thing to do was to lock in the exchange rate. We did not cover everything because we did it in stages.

Your view on fund raising now?
As far as we are concerned, the lines were secured last October, so now it is just making payments. At the end of the financial year, we expect our gross gearing ratio to be about 62% to 63%; this is still all right by industry standards, it is not above one, which will be a cause for concern. Bear in mind that this gearing ratio is calculated on the basis that all our plantation assets are reflected at cost. We have not revalued our assets; so if we do a revaluation, there will be an improvement in equity value.

Have you set KPIs for NBPOL?
We will discuss this at our board meeting; we will talk about a five- year plan. All along, it was a standalone company, now it is part of the Sime Darby family. The way it rolls out its business will need to move in harmony with Sime Darby’s aspiration and strategy roadmap.

Nick Thompson, in his speech, alluded that NBPOL had done well in the past because management was given authority and the freedom to act and so on. How far will this continue?
This is the beginning of a new phase, a journey that will see exciting things and developments. The immediate thing that has come out of this acquisition is that we will be appointing Simon Lord, who is the head of sustainability, as head of Sime Darby’s group sustainability. Simon is acknowledged as one of the top sustainability guys in the market. We hope that by having him on board, our sustainability standards will be further improved.

Enhancing our sustainability profile translates into financial benefits. One of NBPOL’s key strengths is sustainability value and it produces around half a million tonnes while we have been producing 2.4 million to 2.5 million tonnes. So, you see the impact on our production, it is enormous.

There are other things in the pipeline which I cannot share with you today, where an acquisition will open doors for other favourable developments.

Is it being explored?
Yes.

This article first appeared in The Edge Malaysia Weekly, on March 30 - April 5, 2015.

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