Low returns aside, Palmco shares worth the hold


IF an investor had bought one lot of Palmco Holdings Bhd shares for RM1,840 in January 1990 and held on to it up to Dec 31, 2002, he would have netted a gain of RM3,007, inclusive of dividends and capital gains. 

Despite the low return, there are good reasons to hold on to the investment that has grown to 1,200 shares. 

Palmco, which was a palm oil refiner more than a decade ago, is now one of the largest palm-based manufacturers in Asia. It may also be a rising star in the plantations sector. 

“Palmco has now transformed into an integrated plantations group with presence in upstream activities after the recent acquisition of oil palm plantations from Unilever?There are better prospects ahead,'' said a senior analyst. 

With the RM555mil acquisition last December, Palmco's plantation area has expanded to 28,045ha from 5,000ha. 

The large plantation provides Palmco with a natural hedge against the fluctuation in palm kernel oil prices which track crude palm oil (CPO) prices. 

The company can now enjoy the contribution from oleochemicals operations and plantations instead of just those from manufacturing as had been the case previously. 

The adverse impact of strong kernel oil prices on the company's profit margin will be mitigated by higher revenue from palm oil production during an upcycle in crude palm oil, and vice versa. 

Palm kernel oil is its main raw material and also a major cost component. 

The company's share price dipped below RM1 in 1998 owing to the surge in the CPO price which ate into its profit, and compounded by low efficiency and the sluggish market sentiment then. 

Those that had bought the shares at the time would be at least five times richer now. 

The few analysts who track the counter think Palmco's valuation should follow the valuation model of an integrated plantation outfit which commands a higher premium than a manufacturer. 

They said Palmco was more appealing than some large plantation groups which were not engaged in downstream activities to cushion the cyclical commodity prices. 

However, certain investors and analysts do not favour Pamlco because of its low liquidity. The 201.67 million shares are tightly held. The company so far has not made any bonus issues to reward its shareholders. 

Palmco's dividend payment has not been that great either.  

Investors received only RM452 in total dividends over the last 13 years. 

Given its strong cashflow (estimated at RM125mil annually) and low capital expenditure, analysts expect Palmco to be more generous on dividend payments in future. 

Palmco has net cash per share of 60 sen after the recent plantation purchase. 

The latest developments would lay a strong financial foundation for Palmco's share price to climb further, rather than being lifted by a corporate tussle or takeover exercise as in the past. 

The company was a prized asset that many had wanted to gain control of even before the takeover battle between IOI Corp Bhd and Sime Darby Bhd that began in July 2001. 

In December 1990, the Johor State Economic Development Corp (JSEDC) had sought control of Palmco, which was then headed by its founders - the Chan family from Penang. But the Chan brothers – Robert and Steven – somehow managed to defend their position. 

A year on, Mega First Corp Bhd, whose managing director was Lim Keng Kay (brother of Primary Industries Minister Datuk Seri Dr Lim Keng Yaik), joined the fray for boardroom control, raising its stake in Palmco to 26.62% from 2.3%. The JSEDC and the Chan brothers held 27% and 26% stakes respectively then. 

IOI came into picture in 1997 when it bought a 32.96% stake at RM4.35 per share or RM249.2mil cash from Mega First. 

That acquisition was considered controversial by some minority shareholders who found that IOI was obliged to make a mandatory general offer (MGO). And IOI did make an MGO at RM4.60 per share four years later, but for the purpose of retaining control over Palmco, as Sime Darby also wanted a controlling stake in Palmco when the latter started to bear the fruits of IOI's efforts to turn it around. 

IOI and Sime Darby currently hold 52% and 22% interest respectively in Palmco. 

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