This article first appeared in Forum, The Edge Malaysia Weekly on September 4, 2023 - September 10, 2023

Some businesses are best left to the entrepreneurs. They put in their money, take risks and manage the business much better than professional managers. The plantation industry is one such business.

The majority of the top 10 oil palm plantation companies in the world with extensive upstream and downstream operations are family owned.

Thes likes of Cargill Inc, Wilmar International Ltd and Musim Mas Group have a finger in all segments of the agricultural industry — from owning plantations and processing the produce to trading commodities. The founding families are very much in control of the shareholding, and in the case of Wilmar, the key operations are run by members of the family themselves.

Sime Darby Plantations Bhd (Sime Plant), with 233,954ha of planted area under its care, is one of the few among the top 10 plantation companies in the world that is owned by an institution and managed by professional managers.

Sime Plant’s performance as a plantation company has so far been above average.

Its fresh fruit bunch (FFB) production per hectare was close to 20 tonnes in 2019. Post-Covid, FFB production dropped to 16.63 tonnes per hectare in 2022 due to manpower issues. But Sime Plant was profitable both before and after Covid.

But the same cannot be said for plantation companies owned by government-linked investment companies (GLICs).

FGV Holdings Bhd, which is owned by FELDA, TH Plantations Bhd and Boustead Plantations Bhd (Boustead Plant) are examples of professionally managed plantation companies that have performed below expectation.

TH Plantations, which is owned by Lembaga Tabung Haji (LTH) and has a planted area of 56,147ha, produced an average of 13.21 tonnes per hectare last year. Pre-Covid in 2019, production was 18.81 tonnes per hectare.

Although production has dropped in the last two years, TH Plantations has been profitable on account of higher crude palm oil (CPO) prices. Production was much higher in 2018 and 2019 but the company was in the red on the back of lower CPO prices.

FGV’s story is similar. Its production dropped in the last two years but it was profitable, primarily due to higher CPO prices. In 2018 and 2019, the company, which manages 334,075ha of planted area, produced more FFB but slipped into the red when average CPO prices hovered at less than RM2,300 per tonne.

Essentially, the main reason plantation companies made bumper profits from 2020 was the higher CPO price and not improved production.

What will happen when CPO prices normalise to RM2,500 per tonne? How many plantation companies will fall into the red, especially those that had not invested in replanting and maintaining their plantations?

This is probably why the Armed Forces Fund Board (LTAT) has decided to sell a majority stake in Boustead Plant to Kuala Lumpur Kepong Bhd (KLK).

Boustead Plant’s production was below the industry average even before Covid. It averaged between 14 and 15 tonnes per hectare in 2018, 2019 and 2020. In the last two years, production dropped to less than 14 tonnes per hectare but the company posted a strong profit.

This is because Boustead Plant’s average CPO selling price was RM4,341 per tonne in 2021 and RM5,066 per tonne in 2022. In 2018 and 2019, when the company’s average CPO selling price was below RM2,300, Boustead Plant was making a loss from its operations.

Boustead Bhd and LTAT are selling a substantial stake in Boustead Plant to KLK at a premium to its net tangible asset value. The deal, when completed, will see LTAT/Boustead hold 35% of Boustead Plant while KLK will hold the remainder.

Effectively, LTAT has shifted the task of building its plantation portfolio to KLK. It is a viable solution for the group which has big debts and even bigger problems such as completing its defence projects.

Generally, the less efficient plantation companies will likely slide into losses when CPO prices drop to below RM2,500 per tonne. The last three years have been abnormal for commodities but this will not continue for long.

At the moment, CPO is trading at about RM4,000 per tonne, which still gives plantation companies a healthy margin. However, the prices are expected to normalise in the coming months.

The operational costs of plantation companies have gone up in the last three years. When CPO prices come down, some cost elements, such as wages, will not drop, hence impacting the bottom line even more than in the pre-pandemic period.

It is not cheap to replant and improve plantations because a gestation period of up to seven years is involved before the company can see the fruit of its labour.

For instance, FGV has spent about RM300 million a year on replanting costs to improve the tree profile of its plantations. When it was listed in 2012, 53% of its trees were more than 21 years old. In 2020, the percentage had dropped to 32% due to replanting activities.

The investment improved FGV’s prospects but it has still not paid off for the company. Based on its latest quarterly results, the politically sensitive plantation company was pulled down by a higher operational cost and lower CPO prices.

The plantation industry is not the only sector where the GLICs generally do not fare well.

Another area is the construction industry where most of them lose money even in government jobs given at favourable terms. Usually, owner-driven construction companies do better than those controlled by GLICs.

The likes of Khazanah Nasional Bhd, LTH and the Employees Provident Fund (EPF) have not done well with their investments in construction-related companies. Khazanah has even delisted its construction arm, UEM Builders, which hardly features in major construction jobs these days.

An exception is IJM Corp Bhd, which has regularly rewarded its major shareholder, EPF, with consistent dividends.

In short, not all businesses are suited to GLICs. When it involves getting their hands dirty and being on the ground to ensure the subcontractors complete their jobs in accordance with design and in time, it is the owner-driven construction companies that do better.

The same applies to plantations, where only Sime Plant has delivered to Permodalan Nasional Bhd so far.

The underperforming plantations under GLICs should look at the Boustead/LTAT-KLK template where the partner is a reputable entity that comes with a proven track record to better manage their plantations.

M Shanmugam is a contributing editor at The Edge

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