Guthrie gets set to reap


  • Business
  • Saturday, 29 Mar 2003

BY ERROL OH

THE estate life is not quite Tan Sri Abdul Khalid Ibrahim's cup of tea. He admires the planters' esprit de corps and marvels at how well they have settled in at the estates, but he admits that he is not suited for such a lifestyle. The Kumpulan Guthrie Bhd's group chief executive officer recalls a typical visit: “After two nights, the burung hantu (owl) was already getting on my nerves.”  

What probably annoys him just as much is the criticism stemming from the company's acquisition of Indonesian oil palm plantations in late year 2000. It was a huge deal that tripled Guthrie's oil palm holdings to 300,000 hectares (ha). 

The purchase cost US$368 million (RM1.4 billion) and resulted in an enormous debt burden that has stretched the company's balance sheet to the point that investors are deterred from picking up its shares. 

Analysts have either called a sell on the stock or just ignored it. They feel that Guthrie has chomped off more than it can chew. They also warn that it will take the company several years to digest this acquisition and enjoy the fruits. 

Even when crude palm oil (CPO) market is at its most bullish, the analysts have no problems recommending other stocks over Guthrie. They say there is nothing in Guthrie’s track record to suggest that it will fare better than the top performers. 

“If you want a company with exposure to Indonesian plantations, Kuala Lumpur Kepong Bhd (KLK) is a better bet,” says a long-time plantation analyst. “For pure palm oil play, I'd go for PPB Oil Palms Bhd and United Plantations Bhd. And if you prefer companies with strong management and good dividends, IOI Corp Bhd and KLK are the top picks.” 

Khalid is the first person to agree that it will be a while before the Indonesian estates – all under the Minamas Plantation banner – come into their own and help Guthrie fulfil its potential to be a plantation and property giant. 

But that is precisely his point. He says people have overlooked the company's long-range strategy and the fact that the palm oil business is one of the few local industries that are likely to do well in the face of globalisation. Instead, he complains, Guthrie is evaluated based on quarterly results 

“Palm oil is a long-term investment. When you make a decision, you see the impact 20 to 25 years later. When you analyse a plantation company on a quarterly basis although the industry works in 20-years' spans, the analysis will be skewed,” he argues. 

Nevertheless, analysts insist that investors will not be keen about Guthrie until the Indonesian plantations start to show earnings that are a lot stronger than the interest expense. 

However, it says something that a brokerage continues to cover Guthrie despite maintaining a sell call on the stock for over two years.  

An analyst from the brokerage explains: “The company will turn around in a big way. It's just a matter of when, and we want to be in early when that happens. That's why we're covering it”.  

Khalid, 56, is clearly a man waiting for vindication. But there is a lot more at stake than the satisfaction of being proven right. 

He took the top job at Guthrie in July 1994. Before that, he had been with Permodalan Nasional Bhd (PNB) for 16 years, the last four as group chief executive. It was at PNB that he became a public figure, mainly because of his role in promoting the unit trust concept through Amanah Saham Nasional. 

He was also a member of the team behind the famous “dawn raid' on the London Stock Exchange in 1981 that saw PNB wresting control of Guthrie Corp Ltd from British interests. Guthrie is the successor to Guthrie Corp. 

Upon leaving PNB, he was given an option to purchase a 5 per cent stake in Guthrie from PNB at a discount to the market price. According to the company's 2001 annual report, he had a 3.79 per cent stake as at last May. 

Khalid says he has two years to exercise an option to acquire another 135 million shares. “That also gives me the motivation to work harder to produce results.” 

There is indeed a lot of hard work to be done. In an interview with BizWeek, Khalid explains why Guthrie dared to go ahead with the Minamas acquisition. He also spoke about his time at the helm of the company. Excerpts: 

 

BizWeek: When you were deciding whether to buy the Minamas plantations, what was that one factor that persuaded you to go for it? 

Khalid: They had 150,000 ha planted and there were 50,000 ha still to be planted. Guthrie had about 100,000 ha at the time. So, in one move, the size of our plantations has tripled. In the plantation industry, economies of scale play the most important part. They allow you to be competitive. You can reduce your costs because you can spread it out. 

If we could produce 3 to 4 tons of CPO per hectare and if we had 300,000 ha, we'd produce over a million tons of oil. This puts us in a highly strategic position. And I don't think we'll get the opportunity to develop another 200,000 ha in another 30 to 50 years.  

Of course, pricing was a key factor. The downturn gave us an opportunity to make a competitive bid. At the peak of the market, people were buying plantations at around US$4,500 to US$5,500 per ha. But we were only willing to take the risk – and there were a lot of risks involved – for around US$3,300 to US$3,500 per ha. 

People didn't realise that Guthrie's only assets were land. How do you fund the acquisition? Because of the timing, we needed to borrow first. But we knew that we couldn't finance long-term investments with bank borrowings. 

And we didn't go back to the shareholders to ask for more money. At the time, Guthrie had assets but its earnings were low. If we had made a cash call, we would dilute the earnings per share.  

Therefore, the shareholders might not be interested. Our strategy was to sell some of our properties in order to partly pay for the Indonesian plantations. 

What are the ideas behind the target of 1 million tons? 

Last time, we could only produce about 300,000 tons of CPO. Now, with output from the Indonesian plantations, we are already approaching 500,000 tons. After acquiring Minamas, we started with over 150,000 tons between April and December 2001.  

Last year, we have already increased the Indonesian plantations' output to 250,000 to 260,000 tons. We are targeting over 300,000 to 400,000 tons this year. So you see, our total group output is already growing. 

We want to achieve higher productivity. That's why we talk about Vision 25:25.  

In Malaysia, a matured plantation normally has a yield of 20 tons of fresh fruit bunches (FFB) per ha. The FFB is processed at the mill and that brings us to the oil extraction rate (OER), which is between 18 and 20 per cent in Malaysia. 

This is why we calculated our target total output based on 4 tons of oil per ha. A hectare produces 20 tons of FFB and with a 20 per cent OER, you get 4 tons of oil. That's for a reasonably managed estate. If I have 100,000 ha fully developed, I should be getting 350,000 to 400,000 tons of oil.  

But I want to push the management to go higher than that – to produce 25 tons of FFB per ha and to attain 25 per cent OER. Then we get 6.25 tons of oil per ha. Is it an imaginary target? No. Some plantations have achieved that. If we can adopt the best-developed practices, we may be able to push to that level.  

We also rely on biotechnology to come up with palms that can produce 30 to 35 tons of FFB per hectare. But it takes six to seven years of hard work to achieve this target. 

That's why we say, hey, if we have 250,000 ha in Malaysia and Indonesia, and if we can increase the output to 6 tons per hectare, we can produce about 1.5 millions tons. That means Guthrie can grow from a position of low earnings to one of very high potential earnings. 

And once we start producing 1 million tons of oil, we should be thinking of downstream activities. We have to think about adding value. But we go one step at a time. Now is a time to show the critics and the public what we have done. 

Another issue about the Indonesians acquisition is the political risk. What do you say about that? 

Do you realise that a certain European investor is a big investor in plantations in Indonesia? And the size is far greater. Guthrie is the biggest Malaysian investor in Indonesia in plantations but it's not the biggest foreign investor there. 

You can only invest in Indonesia if you know the business. Guthrie knows the business. And we are going in as a producer. 

Indonesian is working on attracting investments. We can see the difference. When we entered in 2000, there were so many complications. The labour laws and property rights have improved. Of course, it takes a bit of time, but they are doing it. 

If you go to Indonesia now to buy the same type of plantations Guthrie bought, you won't get as good a price. The market has realised that the risks have reduced. Of course, there are risks. Even investing in Malaysia has its risks. But the risks in Indonesia are far less now. 

We were more bullish about Indonesia because the labour problems there will be far fewer than in Malaysia. That enables us to compete on price. The potential for cost reduction is far greater in Indonesia.  

 

What more needs to be done at Minamas? 

We want to make sure that all the estates adopt the best practices used in Malaysia so that the estates achieve the standard of productivity as we had envisaged. It is a matter of management – supervision, motivation, control and so on. We must work at harnessing the potential value. Also, we have to build good mills, roads, storage tanks and housing. 

 

What major factors can hinder Guthrie from realising its overall strategy? 

There are things not within our control such as the price of palm oil. If it goes down, it will slow us down. But it is not really a strong factor. Another reason we went into Indonesia was because the production cost per ton of CPO was lower than that in Malaysia.  

Therefore, even when CPO prices are lower, we would be operating in a lower-cost area. That puts Guthrie in a competitive position, not only in Malaysia but also in the whole world, because Malaysia and Indonesia produce over 85 per cent of the world's palm oil. 

I have a view that because it is not easy to expand palm oil supply, the price is likely to be steady over the next four to five years. The current investment climate is not conducive for people to make long-term decisions. Those who are in a position to do so are already in the plantation business. I can see us having an opportunity to reap the benefits of the lack of supply over the next three to four years. That gives us a good start. If somebody is to come in after that, it will take him 3 1/2 years to add to the supply. So we have at least four to seven years of lead-time. 

Another factor is the effectiveness of our management. The fortunate part about the oil palm industry is that the information is very transparent. If Guthrie produces 2 tons per ha, everybody knows. In the past year, we have got awards for high productivity in Malaysia. That's a small indication that we can be competitive. It's not that we're already there, but at least, we are in a competitive mode. 

Also, we can compare our performance in Malaysia with that in Indonesia. We have natural benchmarking, and we can make our managers and workers compete with each other. 

For our property division, we have begun with Bukit Jelutong because of its strategic location. We have already secured the privatisation of the Guthrie Corridor Expressway (GCE), of which 80 per cent passes through our property. This puts Guthrie in the forefront of property development. Before 1995, we had not even sold a single house. 

Of course, we must appreciate that the property market has its ups and downs. But we're prepared for the long haul. If there is demand in the market, we can meet it. If there isn't, the property remains with Guthrie; our cost of entry has already been absorbed. 

 

A main criticism is Guthrie's large debt burden. Is that still a problem? 

No, we started reducing it last year. If palm oil prices improve and if we list Minamas, it will reduce further. Just like any venture, we have to take a position.  

We have to work on it, increase revenue and margin, and reduce debts. We feel that the payback for Minamas will come in five to seven years. If things go well, it will take care of itself. The shareholders expect the management to make the best possible use of the company's resources, which we are doing. 

Was there at any point that you had self-doubt, and felt that things were not going the way you had in mind? 

No. I was a fund manager. A fund manager has enormous flexibility. You make one decision today. You can make another one tomorrow. In property and plantations, you cannot afford to make many decisions. For example, once you cut the rubber trees and plant oil palm, that's it. You are there for the next 15 to 20 years, rain or shine. That's the reason it takes a bit of time for Guthrie to restructure. 

Today, I have a good asset, but I cannot sell it tomorrow. If you just sell an agricultural asset, you don't get the value. You have to get government approvals for conversion. You have to get the plan done. Then only it has market potential. You have to create and develop it before you can even present it to potential buyers. 

 

Do you see people coming around in their perception of Guthrie? 

Some of them now come up to me and said they wished they had been with us in Indonesia. If you go into Indonesia now, you’ve got to pay a higher price. That's what it's all about. You take a position and stay put. It's about having a strategy and implementing it. Of course, there is a lot of work to be done. For example, to get the GCE project, we had to make presentations to the government. We had lots of meetings. We had to acquire other people's land. 

 

Is it time for you to look at your critics and say, “You were wrong”? 

Well, I thought they were wrong all along. But of course, now I can talk about the progress. Previously, I talked about conceptual things. Now, I'm quite happy for others to monitor how we're doing. The performance of the Indonesian plantations is improving fast. People can look at how many miles of roads have been built and what our production per quarter is. The can look at the progress of the flotation of the company (Minamas). Everything is already on track. Of course, they will ask why we're not doing it fast enough. But that's not the issue. Things are already moving. 

 

It's been close to 10 years since you went over to Guthrie. How are things different compared with what you had in mind at the beginning? 

Managing funds is very different than managing companies. I enjoyed fund management. Now I enjoy managing a “real business”, which takes a little bit more time to be realised.  

The gestation period in fund management is shorter. But all said and done, I think I made the right decision. In the current situation, I would be having a harder time as a fund manager. 

 

Do you see yourself in Guthrie as a cross between a manager and an entrepreneur? 

I regard myself as an executor. I execute things. But it doesn't matter. I've now realised that people could be successful in different ways. A priest, for example, is not interested in profits but he can be very successful by delivering in other ways. It's a question of allowing people to harness their abilities. 

An entrepreneur's efforts depend on the financial rewards. But there are also people who do things without banking on getting these rewards. I don't aspire to create enormous wealth.  

But I aspire to do things successfully. I want to leave a mark every time I'm at an organisation. I feel I've left some legacy at PNB. Hopefully, I will do the same at Guthrie. I can say I've developed Minamas. I've created the GCE. I've developed the Bukit Jelutong property. 

 

How long before you'll be looking back at your time in Guthrie? 

Another two to three years. By then, Guthrie will be cruising already. I will then decide whether it's worth continuing. 

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