Friday 02 Jun 2023
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KUALA LUMPUR (Jan 4): Undervalued small- and medium-capitalisation (SMID) plantation companies will be potential merger and acquisition (M&A) or privatisation targets as the crude palm oil (CPO) price stays at or below the RM4,000 per ton mark, said Maybank Investment Bank. 

The research house in a note on Wednesday (Jan 4) said the strengthened financial position of planters will facilitate more M&A activities at the right prices. Otherwise, the excess cash piles are likely to be returned to shareholders in the form of sustained higher dividend payouts over time. 

“The SMID stocks remain undervalued relative to the latest transacted physical prices for oil palm estates, and even more so for planters with strategic land bank that offers alternative use, such as property development,” said Maybank IB, which has a "buy" recommendation for SMID counters Boustead Plantations Bhd (target price: 84 sen) and Ta Ann Holdings Bhd (RM4.06). 

The research house said Boustead Plantations remains undervalued, as it trades at just 0.49 times price-to-book value (P/BV), and 0.37 times price over revalued or revised net asset value, and an enterprise value (EV) of RM30,906 per planted hectare.  

It noted that Boustead Plantations' major shareholders own a combined 68.8% equity stake — 57.4% by Boustead Holdings Bhd and 11.4% by the Armed Forces Fund Board (LTAT), which in turn owns over 59% of Boustead Holdings.

Meanwhile, Maybank IB said a notable privatisation candidate is Hap Seng Plantations Holdings Bhd, as it trades at an attractive EV of RM33,255 per planted hectare, a P/BV of 0.81 times, and with net cash of 54 sen per share. Hap Seng Consolidated Bhd owns 74.9% of Hap Seng Plantations.

The research house said the motivation for M&A stems from commitments to “No Deforestation, No Peat and No Exploitation” by established planters translating into increasing interest in brownfield land, scarcity of strategic land, rising cost pressures and worker shortages, and an under-appreciation of the value of SMID planters.  

“As the CPO price and equity valuations have come off their peak (from the highs in the first half of 2022) to RM4,000/t price levels, we believe this will fuel more M&A activities in 2023. 

Maybank IB noted that there are attractive valuation gaps between the transacted physical prices (2021-22 average: RM64,791 per hectare) and the equity value of many of the SMID firms.

“Those that we observe trade at implied unadjusted EV/hectare of just RM14,500-RM35,000, which are at or below their replacement cost. Overall, 68% of the KL Plantation Index constituents traded below one times P/BV (as at Dec 31, 2022),” it said. 

In 2022, the research house said, M&A worth RM970 million was announced, versus 2021’s M&A activities worth RM4.28 billion, skewed by the successful privatisation of IJM Plantations Bhd (delisted on Dec 6, 2021) that cost Kuala Lumpur Kepong Bhd (KLK) RM2.6 billion in cash for a 95% equity stake. 

In 2022, M&A value fell by 77% to just RM970 million, with the bulk of it, about 74% in value, transacted for non-oil palm expansion purposes, it noted. 

The most notable M&A deal in 2022 was the proposed sale of 384 hectares of freehold land in Kapar, Selangor by Sime Darby Plantation Bhd to Sime Darby Property Bhd for RM618 million cash or RM1,609,472 per hectare (pre-land conversion).  

“The high transaction price, at about 25 times the average physical transacted price of RM64,791 per hectare in 2021-2022, was due to property development value potential of Kapar,” said Maybank IB. 

Maybank IB said the high CPO price enjoyed over the last two years and asset disposal initiatives by a few planters had quickly helped strengthen the financial positions of Malaysian planters.  

“Net gearing of plantation companies that we monitor has improved sharply since 2019, with the exception of KLK (due to its acquisition of IJM Plantations in 2021). Most plantation companies have manageable net gearing of less than 50% to weather any concerns over recent hikes in interest rates.  

“Among the planters, TH Plantations Bhd had the highest net gearing at 64.1% (as at September 2022), but the management is targeting some asset disposals to help deleverage,” it added. 

It noted that Ta Ann and Sarawak Oil Palms Bhd have joined United Plantations Bhd and Hap Seng Plantations in the net cash position category. 

Maybank IB said downside risks to its projections include a reversal of the Brent crude oil price to sharply below US$80 per barrel, negative import/export policies, stronger-than-expected production in the first quarter of 2023, slower-than-expected global demand, and weaker competing oil prices (like soybean and rapeseed).

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