This article first appeared in The Edge Malaysia Weekly on August 28, 2023 - September 3, 2023

OVER the next few months, all eyes will be on Lembaga Tabung Angkatan Tentera (LTAT) or the Armed Forces Fund Board, awaiting at least another corporate exercise that it may have up its sleeve.

After two exercises — the privatisation of Boustead Holdings Bhd (BHB) and the sale of a 33% stake in Boustead Plantations Bhd — LTAT and its flagship BHB are understood to be in talks for a new substantial shareholder to buy into pharmaceutical outfit Pharmaniaga Bhd.

“It’s an international company, a respected name, a big name,” a source with knowledge of the matter says. He declined to comment further.

While details of the Pharmaniaga sale are scarce, LTAT will be hard-pressed to match the tripartite strategic collaboration agreement (SCA) announced last Thursday involving plantation giant Kuala Lumpur Kepong Bhd (KLK) acquiring 33% and one share in Boustead Plantations from LTAT and BHB for RM1.15 billion or RM1.55 per share and triggering a general offer. The plan involves KLK controlling 65% of Boustead Plantations and LTAT piggybacking on a 35% stake, which it can opt to sell to KLK as well.

KLK is understood to have pipped IOI Corp Bhd and Samling Group for the stake in Boustead Plantations.

“Boustead Plantations had put out feelers to something like 16 companies and a handful replied … Tan Sri Syed Mokhtar Albukhary’s Tradewinds Corp, IOI, KLK, Samling and YTL group, among others, but KLK’s was the most attractive deal,” a source close to LTAT says.

It is noteworthy that Boustead Group and KLK have a long-standing 50:50 joint venture in Applied Agricultural Resources Sdn Bhd, formed in 1986, to carry out applied research and development to support the plantation activities of the two groups.

The RM1.55 price tag values Boustead Plantations at a high RM3.47 billion. Since June this year, its shares have gained more than 140% from 64 sen to RM1.55, which is the price of the takeover, indicating that LTAT has extracted full value from Boustead Plantations.

A market observer laments: “LTAT has pulled off a caper. The sale to KLK is a good deal for them (LTAT) and leaves KLK holding the baby, taking all the risks. Boustead Plantations, while owning a large tract of plantation land, has among the lowest fresh fruit bunch (FFB) yields in the industry. Almost half of its plantations require replanting, which would cost Boustead Plantations RM600 million or thereabouts. It will take a very long time for Boustead Plantations to generate sufficient operating profit to translate into steady dividends for LTAT.”

Put another way, 46% or 32,963ha of Boustead Plantations’ oil palm trees are over 20 years old. At an average replanting cost of RM30,000 per hectare, and a replanting exercise of 5,000ha per year, Boustead Plantations would have to fork out RM150 million a year.

If the deal works out and KLK becomes the major shareholder controlling 65% of Boustead Plantations, it would bear the burden of replanting and other capital expenditure.

Moreover, Boustead Plantations has been underperforming its peers. According to its 2022 annual report, the company’s average FFB yield in Peninsular Malaysia was 17.3 tonnes per hectare. In Sabah, it was 12.2 tonnes per hectare on average while in Sarawak, it was a mere seven tonnes per hectare.

In contrast, United Plantations Bhd achieved an FFB yield of 28 tonnes per hectare in FY2022 from its estates in Malaysia and 25.5 tonnes from its assets in Indonesia.

It is noteworthy that KLK’s FFB yield in FY2022 was 19.7 tonnes per hectare — the lowest the group recorded over the past 10 years.

In its six months ended June, Boustead Plantations suffered a net loss of RM304,000 on revenue of RM400.97 million. In the corresponding period a year ago, Boustead Plantations raked in RM508.37 million on sales of RM673.11 million.

Malaysian Palm Oil Board statistics show that from January to June this year, spot crude palm oil (CPO) prices averaged RM3,921 per tonne while in the first six months of 2022, prices averaged RM5,188.5 per tonne. According to Bloomberg, over the past 10 years, CPO has averaged RM3,011.91 per tonne.

In its nine months ended June, KLK posted a net profit of RM717.95 million on revenue of RM17.87 billion. In the previous corresponding period, KLK raked in RM1.7 billion in net profit from RM20.17 billion in sales.

This sale of 33% of Boustead Plantations for RM1.15 billion in cash is happening less than six months after LTAT privatised BHB, snapping up the 40.58% it did not own for RM702.3 million in March this year.

It should also be noted that BHB has perpetual sukuk to the tune of RM607 million, which carry a coupon rate as high as 11.6% and medium-term notes of RM1.55 billion, of which RM500 million is due next year.

Another aspect of the KLK deal that favours LTAT is the carving out of two parcels — Balau Estate and Malakoff/Mayfield Estate — for the latter or BHB to undertake property development. LTAT and BHB have the right of first refusal to acquire from or form any arrangement with Boustead Plantations on those pieces of land.

The two estates collectively measure 1,600 acres and have a gross development value of RM8 billion.

The Edge understands that certain parties were unhappy that LTAT was looking to hive off control of Boustead Plantations to a non-bumiputera entity.

However, other than LTAT and BHB, the remaining minority shareholders of Boustead Plantations holding 32% are a diverse lot and include non-bumiputera individuals and even the likes of the Federal Land Development Authority with 0.55%. All the shareholders stand to benefit as the offer price of RM1.55 is at a steep premium. Over the past five years, Boustead Plantations’ share price has averaged 56.4 sen.

A source familiar with LTAT, however, says, “The focus should be on whether the deal is good for members of LTAT, namely the armed forces, not on who the buyer of the stake is. LTAT needs to be sustainable, and there is no other way but to address the financial challenges.”

The source adds, “BHB conducted an extensive process to find the best deal for Boustead Plantations that met the financial objectives set by LTAT. The best one turned out to be from KLK. There was an offer from a bumiputera company, but it did not meet the financial objectives of the shareholders. So should we sacrifice a good commercial offer in favour of sentiment?”

Last Friday, following the announcement of the SCA, shares in Boustead Plantations traded to a high of RM1.51 — close to the offer price of RM1.55 — before closing at RM1.49, valuing the group at RM3.34 billion.

Meanwhile, KLK shares closed 2.95% lower at RM21.74, valuing the group at RM23.45 billion. 

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