Friday 24 May 2024
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This article first appeared in The Edge Malaysia Weekly on February 5, 2024 - February 11, 2024

IN a few months, MKH Bhd will float the plantation assets under its wholly-owned MKH Oil Palm (East Kalimantan) Bhd ­(MKHOP) on Bursa Malaysia’s Main Market, in a move to tap growth opportunities near the new Indonesian capital Nusantara. The group’s existing (held via wholly-owned subsidary PT MKH and PT SPS) and prospective plantation assets are located in Muara Kaman in East Kalimantan within the same province where the new capital will be inaugurated in August.

“We have had to build our [plantation business] from zero after setting up in 2008. The opportunities in Nusantara are vast. However, in order to expand there, we need to [list] the company in order to widen our platform,” MKH group executive chairman Tan Sri Alex Chen tells The Edge in an interview at the group’s headquarters in Kajang, Selangor.

Interestingly, MKH has chosen Bursa instead of bourses in Singapore or Jakarta for the flotation exercise, which appears to make more sense since the group’s estates are located in Kalimantan.

“[Bursa] is our first choice because this has been the platform on which we have built our track record since the group’s listing in 1995. Malaysia is familiar territory, and reputation matters, to ease fundraising. We are not well known in Singapore or Indonesia,” says Chen.

The flotation exercise is the first plantation initial public offering (IPO) in seven years since Matang Bhd’s debut in January 2017. Other notable plantation IPOs before that were Boustead Plantations Bhd in June 2014 (now taken private by Lembaga Tabung Angkatan Tentera) and Felda Global Ventures Holdings Bhd (now FGV Holdings Bhd) in June 2012.

Last November, MKH, which is involved in property development, gained shareholder approval for the listing of MKHOP involving a public issuance of 220 million new shares, which amount to 21.5% of its enlarged share capital, and an offer for sale (OFS) of 30.7 million existing shares.

Post-listing, MKH will have around 63% in MKHOP. MKH will use the RM18.4 million from the OFS mainly to repay bank borrowings.

Based on the indicative IPO price of 60 sen apiece disclosed in a Nov 28, 2023 statement, (final price to be determined later) and the enlarged share base of 1.02 billion shares, MKHOP may have a market capitalisation of at least RM612 million upon listing.

MKHOP aims to raise RM132 million through the IPO primarily to acquire an additional 5,000ha of plantation estate in the Muara Kaman district. It intends to complete the land acquisitions within 24 months of the listing.

“We are following up closely on our land bank expansion exercise. Acquiring the land we want will take time as we have to be very discerning in order to attain land with strategic access to the ports, our mill and the new capital,” says Chen, adding that the group seeks only APL (Areal Penggunaan Lain) land otherwise known as “other use areas”, where land can be cleared for oil palm plantation. “If we can get a bigger area in the future, we can also go downstream. This is one of our expectations.”

MKHOP’s two oil palm estates are located near Samarinda and Balikpapan. The former is the provincial capital of East Kalimantan and the latter is the region’s financial centre.

The estates measure a total of 18,205.3ha, of which 93.4% or 17,008.8ha are planted while the remaining 1,196.5ha is unplanted and consists of a palm oil mill, management office, housing, nursery, roads, drains and canals. MKHOP also owns and operates a jetty.

According to the draft prospectus, up to 92% of the group’s planted oil palms are in the “prime mature phase” with an age profile of 10 to 16 years while the balance 7% are aged between four and nine years.

If the opportunity arises, Chen says the group would not shy away from venturing into integrated, industrial or housing developments in East Kalimantan as MKHOP hopes to leverage its estates’ location within a 100km radius of Nusantara.

MKHOP’s average fresh fruit bunch (FFB) yield trended lower from 29.3 tonnes per hectare and 26.7 tonnes per hectare in its financial year ended Sept 30, 2020 (FY2020) and FY2021 to 23.2 tonnes/ha in FY2022, due to heavy rainfall from the La Niña weather phenomenon in FY2021 and FY2021.

“MKHOP’s [FFB] yield began trending downwards in 2020 due to climate interference. Then we [faced] more than two years of La Niña. [But] with technologies in place, we will be able to harvest better. Now, the El Niño is said to be coming back but plantations such as ours, which are flat, are better [off in facing bad weather],” says MKHOP executive director Datuk Andy Lee Khee Meng.

Its plantations and mill are Indonesia Sustainable Palm Oil (ISPO) certified. “We do not need RSPO (Roundtable on Sustainable Palm Oil) certification as yet since our produce is not yet at a scale where it is being exported,” Chen says.

Labour not an issue

Chen points out that unlike planters in Malaysia who faced a severe shortage of workers in the aftermath of the Covid-19 pandemic, MKHOP does not have this problem, even with the development of Indonesia’s new capital nearby. This is attributable to Indonesia’s population of over 270 million, transmigration as well as the return of workers from abroad.

“In addition, our higher usage of mechanisation in our plantations compared with other plantations appeals to workers as it eases their labour and expedites harvesting.

“Mechanisation enhances productivity tremendously, with a ratio of about one worker per 15ha compared with one worker for every 7ha for manual labour. Part of the proceeds from the IPO will be utilised to mechanise the plantation fully from an estimated 30% to 40% only currently,” explains Lee.

MKHOP’s sole mill has a production capacity of about 90 tonnes per hour, which Chen says is adequate for the company currently.

When asked about ease of doing business in Indonesia, Chen explains that Indonesia’s new investment ruling allows foreign businesses to wholly own the business entity in the country.

“The only ‘condition’ is that the 100% shareholding [by the foreign entity] is limited to sizeable plantation companies which are able to provide job opportunities to locals and, of course, be taxed on their earnings,” MKH’s treasury director and group company secretary Tan Wan San explains.

“The Indonesian government has placed great emphasis on growing the plantation sector for the uses of converting its produce into jet fuel, biodiesel as well as general consumption,” says Chen.

Chen ventured into the oil palm plantation business in 1970 when he acquired a poorly-managed plantation in Selangor, which he transformed and sold for a good price later.

“It was a learning experience that impacted me profoundly as I realised how lucrative a business the oil palm plantation was. I then travelled around Malaysia and around the region in search of land that met my ideals,” says Chen.

Between 2005 and 2008, MKHOP was presented with the opportunity to venture into oil palm plantation in East Kalimantan, establishing what is now the group’s profitable foothold in the Indonesian market.

According to MKH’s 2023 annual report, its plantation division recorded revenue of RM338.0 million and profit before tax of RM37.5 million or 32% of group PBT in FY2023.

“CPO (crude palm oil) prices remain well supported in view of good demand and tighter supply with the current CPO price trading at approximately RM3,600/tonne (net of export levy and duty) in Indonesia.

“With the anticipated higher CPO production in FY2024, due to the weather normalisation and enhancement of our production efficiencies [via mechanisation], we expect our plantation division to deliver better results for FY2024,” it said.

“CPO prices will always be volatile. I noticed that since [owning] my first plantation. We will have to brave the price fluctuations, no matter how difficult they are. The truth about this business is that high CPO prices are what give us the high margins, with which we can repay loans in advance,” says Chen. 

 

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