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

KUALA Lumpur Kepong Bhd’s (KLK) strategic collaboration agreement (SCA) with Lembaga Tabung Angkatan Tentera (LTAT) and Boustead Holdings Bhd (BHB) — which will see the Ipoh-based integrated plantation group emerge with a 65% stake in Boustead Plantations Bhd — will lead to a more balanced portfolio of its upstream assets from a geographical perspective.

Currently, close to 60% of KLK’s planted area is located outside Malaysia, predominantly in Indonesia. With Boustead Plantations’ planted area of 72,291ha in Malaysia, KLK’s total planted area will increase by 24% to 370,274ha, with 53% of it located in the plantation giant’s home base.

Its collaboration with LTAT and BHB will see KLK — which, apart from Malaysia and Indonesia, also has a presence in Australia, China, Belgium, Germany, the Netherlands, Switzerland and Liberia — investing back in Malaysia.

“That’s better than the group investing abroad,” says a plantation player.

The SCA comes about two years after KLK’s acquisition of IJM Plantations Bhd. Meanwhile, in early 2021, Batu Kawan Bhd, which owns 47.73% of KLK acquired Chemical Company of Malaysia Bhd.

As the group digests its two recent major acquisitions, industry observers have voiced concerns over the integration of two very different cultures and management styles, given that KLK is entrepreneur-driven while Boustead Plantations is ultimately owned by retirement fund LTAT.

In response to queries from The Edge, KLK’s management says it has a good track record in effectively integrating similar strategic collaborations across the group.

“KLK works well with strategic partners, as seen in other JV (joint venture) partners in Indonesia. With Boustead Plantations, there is synergy that can lead to operational efficiency, but this will take time,” the group adds.

It is worth noting that KLK and Boustead Plantations have equal shares in Applied Agricultural Resources Sdn Bhd that was set up in 1986 to facilitate research studies in tropical plantation crops and provide advisory services to its two shareholders.

Another highlight is the capital expenditure that KLK has to undertake to replant and rehabilitate Boustead Plantations’ oil palm estates, particularly those in Sabah and Sarawak, where the trees in half the planted area are past their prime.

On this, KLK emphasised the fact that the benefits and synergy of the deal will only be realised in the long term.

“We will look carefully at the operational level on how to derive better efficiency, performance and value enhancement from the acquisition post-completion and evaluate,” it says in a written response, adding that KLK will be bearing Boustead Plantations’ gearing and capital expenditure in the future.

One estimate puts the annual replanting cost at RM150 million for 5,000ha at RM30,000 per hectare.

“It is undeniable that a huge financial commitment will be necessary to replant and turn around Boustead Plantations’ unproductive and ageing estates. At the same time, there are not many plantation players locally who can match KLK in terms of financial resources, track record and long-term commitment in turning around those underperforming oil palm estates, in our view,” says boutique fund house Tradeview Capital Sdn Bhd’s portfolio manager Neoh Jia Man.

As a turnaround will take time, KLK could monetise certain land bank that might be suitable for development to ease cash flow drains and unlock value in the near term, he adds.

KLK is funding the exercise via a combination of bank borrowings and internally generated funds. According to its filing with Bursa, KLK’s net gearing will increase to 0.6 times after the completion of the acquisition and the mandatory general offer by the fourth quarter of this year, from 0.4 times as at end-September 2022.

Boustead Plantations slipped into the red in its second quarter ended June 30, 2023 (2QFY2023) with a net loss of RM5.52 million compared with a net profit of RM73.22 million a year ago. In 2QFY2023, in tandem with lower crude palm oil prices, the average CPO price realised fell 41% from RM6,611 per tonne in 2QFY2022 to RM3,926 per tonne.

In FY2022, Boustead Plantations reported a fresh fruit bunch (FFB) yield of 13 tonnes per hectare and oil extraction rate (OER) of 20.6%. These compare with the national average of 15.49 tonnes (FFB yield) and 19.7% (OER).

While the operating statistics for its peninsular estates and mills are better than the national average, the assets in Sabah and Sarawak underperformed (see table on pg 82).

“Given the quality of KLK’s management, they should be able to turn Boustead Plantations around quite quickly. A back-of-the-envelope calculation at the price of RM1.55, based on total land bank shows KLK is buying Boustead Plantations at the enterprise value (EV) of just over RM43,000 per hectare. KLK is being valued roughly at an EV of RM86,000 per hectare,” says a plantation owner and investor, adding, “I think it is a fair price. I am sure LTAT had approached other parties and this is the best they could get.”

While there is no ‘secret sauce’ for the management and agronomy of oil palm planting, given that the crop has been cultivated commercially for over 100 years, good management involves paying meticulous attention to every step of the planting and harvesting process, he adds.

“The staff and workers have to be fully incentivised to do their job well. Most badly managed estate companies are lacking in this respect, and in addition, many suffer from ‘leakages’ in terms of input and output.”

The investor recalls a story of KLK founder, the late Tan Sri Lee Loy Seng, who would drop in at the company’s estate near Ipoh on his way to work. As a result, all the staff were kept on their toes at all times. He points out that a well-known saying about the plantations business is this: “The most powerful fertiliser one can apply are the footsteps of the manager”, or as in the story above, the chairman.

A Maybank Investment Bank Bhd research analyst highlights the fact that at RM1.55, Boustead Plantations is being valued at a price-to-book value of 1.2 times, or about one times its revised net asset value of RM1.60.

“In terms of price-earnings ratio, Boustead Plantations is valued at a forward (core) PER of 66 times, a good deal for the minority shareholders,” writes the analyst, who raised the target price for Boustead Plantations to RM1.55 to mirror KLK’s offer price.

“Given a 13% upside to the offer price, we raise Boustead Plantations to a ‘buy’ from a ‘hold’ to capitalise on the offer. We advise existing shareholders to hold on and take up the cash offer.”

Overall, the analyst community sees KLK’s offer of RM1.55 per share as fair.

A PublicInvest Research analyst believes it is “reasonably priced”, considering that it was valued at an EV of RM56,009 per hectare, which is deemed attractive given its vast land bank in Malaysia with some located in strategic areas that are suitable for property development.

Nevertheless, the analyst points out that the deal may not be near-term earnings-accretive as PublicInvest Research’s calculation shows that there is an earnings dilution of at least 5% to 6% in KLK’s earnings per share (EPS).

A Kenanga Research analyst concurs that the valuation of 1.3 times P/NTA and RM56,000 per planted hectare is “reasonable”. However, high borrowing costs will drag KLK’s FY2024/25 earnings down by 4% to 6%.

“Earnings enhancement could come from FY2025 onwards as Boustead Plantations’ productivity picks up,” says the analyst.

A Hong Leong Investment Bank Research analyst opines that the transaction price for Boustead Plantations “seems fair” at an EV/ha of RM57,600 in comparison to KLK’s acquisition of IJM Plantations in 2021 (at about RM54,000 per hectare).

An Apex Securities Bhd analyst is neutral on the acquisition although he writes that he would reconsider his stance if KLK was able to effectively capitalise on Boustead Plantations’ land bank.

“We don’t anticipate immediate EPS accretion due to the likelihood of Boustead Plantations encountering earnings challenges arising from its involvement in upstream plantation activities,” he adds.

Neoh of Tradeview agrees that KLK would see an earnings dilution in the short term but he still thinks the deal is a fair one as it represents one of the rare opportunities for KLK to expand and consolidate its foothold in the oil palm industry.

“We agree that the integration of two companies with distinct cultures presents a challenge and hence we believe KLK will need to reform the corporate culture.

“To achieve this, it is imperative that KLK secures majority control of Boustead Plantations. Fortunately, we think the company should have no issue in doing so via a mandatory general offer, given the attractive offer price presented by KLK.” 

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