Merger scenarios for govt-linked plantations


THE merger prospects for seven Permodalan Nasional Bhd (PNB)-linked plantation companies, which still appear to be up in the air, have kept most plantation analysts busy on potential scenarios. 

Among the three most likely scenarios painted by analysts involve: 

· Sime Darby Bhd potentially to emerge as the numero uno oil palm plantation company in the world by grouping all the other six PNB-linked plantation companies under its wing; 

·The three big plantation giants – Sime Darby, Kumpulan Guthrie Bhd and Golden Hope Plantations Bhd – to be managed separately, and 

·The existing property divisions of the PNB-linked companies to be consolidated under Island and Peninsular Bhd or a new company to be established soon.  

Two weeks ago, Deputy Prime Minister Datuk Seri Abdullah Ahmad Badawi announced 10 measures to make Malaysian companies more attractive, including the consolidation of government-linked companies on the KLSE. 

So far, none of the PNB-linked plantation companies, namely Sime Darby Bhd, Kumpulan Guthrie Bhd, Golden Hope Plantations Bhd, Guthrie Ropel Bhd, Highlands & Lowlands Bhd, Island & Peninsular (I&P) and Austral Enterprise Bhd have issued statements pertaining to any merger exercise. 

Plantation analysts contacted by StarBiz described any potential merger of the seven listed plantation companies as “a highly complex” process involving valuation and pricing, different risk profiles of the companies, acceptance of minority shareholders at the different companies as well as possibility of retrenchments. 

In its latest note on the plantation sector, UOB Kay Hian Research has focused on Sime Darby as the most suitable vehicle under which the other PNB-linked plantation could be consolidated via share swaps.  

The research unit said: “If one of the government’s aims is to encourage foreign fund participation, Sime Darby will be a good candidate with a long track record and a large following among global fund managers. 

“To conserve cash, we assume the consolidation is done through share swaps between Sime Darby, the plantation companies and their relevant subsidiaries.”  

Companies that could be acquired by Sime Darby include Golden Hope, Guthrie and I&P. The minority shareholders of Guthrie’s listed subsidiaries – Guthrie Ropel and Highlands & Lowlands – as well as I&P subsidiary Austral Enterprise – should also be offered share swaps.  

The acquired companies could then be delisted from the KLSE. 

UOB Kay Hian Research estimated this consolidation to involve share swaps totalling RM8.2bil with a total of 1.47 billion new Sime Darby shares issued (or 63% of existing share capital). PNB’s stake in Sime Darby would then increase to 17.5% from 14.4%. 

It noted that another potential impact of the consolidation was that Sime Darby’s total plantation land bank would jump five-fold from 100,000ha to about 625,000ha. 

“The enlarged land bank has the potential to produce 2.5 tonnes of crude palm oil a year or 10% of the world’s supply, making Sime Darby the largest palm oil company in the world,” it said. 

Even the net earnings of Sime Darby could amount to RM2.2bil per year, assuming average CPO prices of RM1,250 per tonne and reduced production cost of RM630 per tonne. 

In terms of market capitalisation, Sime Darby, under this merger, could be the largest stock on the KLSE with a market capitalisation of RM33bil, making it even larger than Telekom Malaysia Bhd, Malayan Banking Bhd and Tenaga Nasional Bhd

UOB Kay Hian Research added that most of the plantation stocks were trading below their net tangible assets (NTAs). A merged Sime Darby’s NTA could be enhanced by 39.4% to RM4.38 per share from the current RM3.14 per share.  

On its investment strategy, the research unit will stick to counters trading below their NTAs such as Guthrie Ropel, Austral Enterprise, I&P and Highlands & Lowlands. For big capital companies, it prefers Golden Hope over Kumpulan Guthrie due to the latter’s high debt position. 

It also said these PNB-linked plantation companies’ mergers would not adversely impact other plantation companies such as IOI Corp Bhd, PPB Oil Palms Bhd and United Plantations Bhd which were considered already globally competitive. 

UOB Kay Hian said: “These companies’ stock prices could come under pressure due to the downtrend in CPO prices, but we still maintain a buy call for the time being.”  

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