This article first appeared in The Edge Malaysia Weekly on June 21, 2021 - June 27, 2021

IN the wake of diversified group IJM Corp Bhd’s exit from the plantation business through the sale of its entire 56.2% shareholding in IJM Plantations Bhd to Kuala Lumpur Kepong Bhd for RM1.53 billion in cash, the inevitable question arises — which plantation players will be next?

Analysts are of the view that now is a good time for plantation companies to not only take stock of their portfolios but to also take action — by making acquisitions or to let go of non-core assets — given the prevailing elevated crude palm oil (CPO) prices. Year to date, CPO spot prices have averaged at RM4,114 per tonne, a jump of 65% compared to the same period last year.

Some analysts point out that plantation companies struggling on their own make for attractive takeover targets for bigger companies that are on the hunt.

“I think those plantation companies with poor (financial) performance or no succession planning would be the (potential) targets for mergers and acquisitions (M&As),” PublicInvest Research analyst Chong Hoe Leong tells The Edge in an emailed response to questions.

Boustead Plantations Bhd, for one, has been a popular subject of M&A chatter in recent times, especially as its controlling shareholder Boustead Holdings Bhd (BHB) is looking to unlock value in the group under its “Reinventing Boustead” business strategy. A BHB spokesman tells The Edge the group cannot comment due to the upcoming annual general meeting on June 24.

Chong notes that Boustead Plantations has been disposing of small parcels of plantation land to declare dividend payouts. “It has been the practice.”

In a Sept 18, 2020, report, Maybank Investment Bank (Maybank IB) Research analyst Ong Chee Ting noted that since listing in 2014, Boustead Plantations has sold 2,164ha of land, raised about RM1 billion in gross proceeds and recognised total disposal gains of RM900 million. It has also paid out about RM1 billion in total dividends since listing.

Boustead Plantations is a considerably smaller outfit than IJM Plantations. The former has a market capitalisation of RM1.27 billion compared with that of IJM Plantations’ RM2.72 billion as at June 17, 2021.

As at June 8, 2021, Boustead Plantations’ price-to-book ratio was the lowest — among eight comparable companies in the same industry — at 0.51 times, which was well below the industry average of 1.24 times. The stock closed at 56 sen last Thursday, a 52% discount to the latest book value per share of RM1.16, suggesting that it is undervalued. The comparable companies are Sarawak Oil Palms Bhd, Far East Holdings Bhd, Hap Seng Plantations Holdings Bhd, TSH Resources Bhd, Kretam Holdings Bhd, Kim Loong Resources Bhd and United Malacca Bhd.

After two years of losses, Boustead Plantations returned to profitability in the financial year ended Dec 31, 2020 (FY2020), achieving a RM42.95 million net profit compared with a RM144.01 million net loss in the previous year. It kicked off FY2021 on a solid note, with a net profit of RM12.23 million in the first quarter.

Boustead Plantations owned a total of 98,200ha of land in Malaysia as at Dec 31, 2020, of which 73,500ha was planted with oil palm trees. Of the total oil palm planted area, 24,100ha (or 33%) were located in Peninsular Malaysia, 39,100ha (or 53%) in Sabah and 10,300ha (or 14%) in Sarawak.

In his report, Maybank IB Research’s Ong pointed out that of the 19 estates Boustead Plantations owns in Peninsular Malaysia, 89% are strategically located along the highly populated west coast in the states of Selangor, Penang, Johor, Kedah and Perak.

Among the company’s estates, he identified eight that have the potential to be developed for property development in the coming years. “There are broadly two categories: (i) immediate potential: Balau Estate, Kulai Young Estate, Bukit Mertajam Estate, Malakoff Estate and Kuala Muda Estate, and (ii) future potential: Batu Pekaka Estate, Taiping Rubber Plantation and Telok Sengat Estate,” he writes.

Ong believes the prevailing market conditions are conducive for pursuing M&A in the plantation industry. “This is especially so since the equity stocks have yet to fully appreciate the high CPO prices enjoyed by the market in the past few months,” he tells The Edge.

“In addition, new planting has slowed sharply in the past few years due to weak investment cases as well as lack of plantable reserves. The commitments on the NDPE (no deforestation, no peat and no exploitation) policy by established planters also meant an increasing shift in interest towards brownfield estates in search of growth.

“Furthermore, RSPO (Roundtable on Sustainable Palm Oil) members face an increasingly onerous process of complying with RSPO’s new planting procedure on greenfield developments, which may take up to three years before any planting can take place. This is time-consuming and its outcome is uncertain,” he explains.

Ong points out that scarcity of land has also provided a strong impetus for M&A in recent years. “Commitments made by the Malaysian and Indonesian governments to limit or halt available land for oil palm land expansion meant increasing scarcity of land for oil palm.”

Chong concurs. “This would be a good time for potential sellers as they can fetch an attractive selling price for their plantation land bank given the current strong CPO momentum.”

He sees land bank that are close to major infrastructure such as Port Klang, highways and projects like the Malaysia Vision Valley and East Coast Rail Link, especially those with potential for industrial, residential and commercial developments, would be able to fetch good valuations. “In my view, I would think (estates in) Selangor and Johor have better valuations than the rest.”

BHB, the 59.42%-owned investment arm of Lembaga Tabung Angkatan Tentera, had a 57.42% stake in Boustead Plantations as at May 3, 2021. According to industry observers, a way for the group to raise quick money while maintaining control over Boustead Plantations is to reduce its stake in the listed investment to 51%.

A back-of-envelope calculation, using a market cap of RM1.27 billion, shows that a 6.42% stake sale could potentially raise RM81.5 million. However, this will not be enough to move the needle for BHB, whose borrowings totalled RM7.49 billion as at end-March. Of this, RM183.4 million were short-term loans.

BHB also holds equity interest in listed companies Affin Bank Bhd (21%), Boustead Heavy Industries Corp Bhd (65%), Pharmaniaga Bhd (56%) as well as Indonesia-listed pharmaceutical company PT Millennium Pharmacon International Tbk (41%).

One person close to the company sees the group continuing the process of monetising its assets, particularly its loss-making hotel properties, to shore up its balance sheet and pare down debt. Due to the movement restrictions imposed during the Covid-19 pandemic, BHB’s hotel segment incurred an operational loss of RM14.9 million in 1QFY2021 compared with RM19.3 million a year ago.

According to its 2020 annual report, hotel properties currently owned by the group include Royale Chulan Damansara, Royale Chulan Penang Hotel, Royale Chulan Seremban, Royale Chulan Cherating and Royale Chulan Hyde Park in London. In February, BHB disposed of Royale Chulan Bukit Bintang Hotel to Singapore-listed Hotel Royal Ltd for RM177.3 million.

According to Khor Boon Soo, executive director of KGV-Lambert Smith Hampton (Penang), it has been a very trying time for the local hotel and leisure industry due to the ongoing pandemic. “Over the last 12 months, we have witnessed many hotel closures on the (Penang) island, some permanently. The occupancy rate for most of those still in operation have reportedly fallen to below 20%. The drastic drop in occupancy coupled with lower room rates have made it no longer financially viable to operate,” he tells The Edge.

Khor says prospective buyers of hotel properties would be those entities looking beyond the pandemic to when normalcy returns and those who see this period as a buying opportunity to diversify or increase their portfolio.

Some notable hotel properties in Penang recently put up for sale include the luxury The Rice Miller Hotel. And in a recent interview with The Edge, Eastern & Oriental Bhd executive chairman Datuk Tee Eng Ho said he was open to selling the iconic Eastern and Oriental Hotel for the right price.

Khor is of the view that for hotels like Royale Chulan Penang Hotel, if put on the market, its location within the core zone of the George Town Unesco heritage site is an advantage as there are many attractions such as the Esplanade, Fort Cornwallis, Little India, Peranakan Mansion and the Clan Jetties within walking distance. “The Penang Eastern Seafront Development project within the immediate vicinity is now in progress and will further enhance the attractiveness of the locality when completed.”

“There are no recent transactions of comparable hotels in the locality, but previous transactions of international-class hotels within the city have indicated values of at least RM200,000 per room. For a 4-star hotel which is less than 10 years old, the Royale Chulan Penang Hotel could fetch at least RM300,000 per room,” he adds.

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