Sime Darby Bhd has built its reputation as one of the world’s largest listed palm oil conglomerates producing some 2.8 million tonnes of crude palm oil (CPO), which represents 5% of the world’s total production.
Despite its well-diversified business portfolio, Sime’s plantation division has been the mainstay contributing over 40% to the group’s profit annually.
Hence, to keep up with the high momentum in the oil palm business, Sime has aggressively been expanding its land bank overseas given the scarcity of suitable land for oil palm in Malaysia.
Sime has a total land bank of one million ha across Malaysia, Indonesia, Liberia, the Solomon Islands and Papua New Guinea (PNG).
Its latest PNG-based New Britain Palm Oil Ltd (NBPOL) land bank acquisition at £1bil was concluded in March.
Of the group’s total land bank, some 604,106ha represent the total oil palm planted area as of March 31.
The nature of oil palm business has always been a “volume game”, where the upstream plantation players with the biggest production capacity would normally “win”.
It is all about the economies-of-scale, according to many industry players.
For Sime to remain key volume player in the oil palm business, it has to up its ante not only via the land bank expansion mode, but also juggled with the rising cost of production while improving on its key performing palm oil indicators such as the fresh fruit bunches (FFB) production, the FFB yield and the oil extraction rate (OER).
Last year, the group’s FFB production stood at 9.4 million tonnes, the FFB yield at 20.4 tonnes per ha and OER of 21.9% – these sets of indicators are good to better reflect on the management of the 209 estates operated by the Sime’s unit Sime Darby Plantations Sdn Bhd. For financial year just ended June 31, Sime Darby plantations has managed to maintain the cost of producing CPO per tonne at RM1,300 – which is below the industry’s average between RM1,450 and RM1,500 per tonne respectively.
This means that Sime will still be able to churn in reasonable profit by about RM700-RM800 per tonne of CPO even with the CPO price falling by more than 20% to trade between RM1,968 and RM1,990 per tonne level.
Sime president and group CEO Tan Sri Mohd Bakke Salleh has also often been quoted as saying: “For every RM100 per tonne change in the CPO price, it would result in an ‘addition or reduction of RM250mil’ to the group’s profit margins.”
Despite operating under challenging environment with weaker CPO prices and rising global palm oil stockpiles, Sime has a trump card up its sleeves in the form of its NBPOL acquisition to boost the group’s earnings growth.
The NBPOL estates in PNG has strong credentials with a young age palm profile averaging 10.8 years, FFB yield of 23.5 tonnes per ha(five-year average) and OER of 22.5%. Currently, NBPOL has 135,000ha, of which 80,000ha are planted oil palm areas.
This is in comparison with Sime’s oil palm estates in Malaysia and Indonesia which have average palm age profile of 14.5 years.
Based on Sime’s value creation projections, for every increase of US$100 per tonne in CPO price, NBPOL is expected to generate an earnings before interest, taxes, depreciation and amortisation (EBITA) improvement of US$58mil (US$1=RM3.61).
In addition, for every increase of 10% in NBPOL’s FFB yield, NBPOL’s EBITDA is expected to increase by US$49mil.
In fact, the contribution of NBPOL has already been reflected in the newly released fourth quarter result ended June 31, 2015.
Sime plantation earnings was higher due the higher-than-expected contributions from NBPOL and paring down of palm oil inventory, says CIMB Research in its report with NBPOL posted an EBIT of RM95mil.
In FY2015, NBPOL produced about 650,000 tonnes of FFB, representing 6.7% of Sime group’s total FFB production.
Sime is also projecting a 5% rise in its FFB output for FY2016.
During an analysts briefing to announce its FY2015 financial results, Sime expects the CPO prices to average between RM1,900 and RM2,000 per tonne between now until end of the year.
The cost of production including replanting cost is about RM1,450 per tonne. The group’s replanting activities takes up about 4% of the total land bank or 13,968ha per year.
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