SHARES in PPB Oil Palm Bhd have been on an upward trend since the start of this year as investors and analysts grow increasingly confident that the company’s expansion plans will enhance long-term earnings.
The mid-cap plantation company plans to match the current plantation size of IOI Corp Bhd and KL Kepong Bhd through a planting programme on 100,000ha in Indonesia’s central Kalimantan. Upon completion of the programme in five years, the company’s total planted area will rise to around 160,000ha, a large local brokerage said in its research notes.
As PPB Oil Palm has already planted up to 90% of its land in east Malaysia (41% of its total land bank), it is now focusing on expanding in Indonesia where the rest of its estates are located.
The brokerage said the company’s six-year operating experience in Indonesia will help mitigate any risk faced while pursuing its expansion plan.
Once fully planted, PPB Oil Palm's Indonesian estates will be 40% bigger than its local estates, which currently contribute the bulk of its plantation earnings.
According to the report, the company is at an advanced stage of negotiations for another 120,000ha next to its existing land in Kalimantan.
“We expect the price for these estates to be similar to that in its past acquisitions, which is not a significant amount,” the research house said, adding that the RM700mil required for its current planting programme did not pose a problem for the company as its local estates generated strong cash flows of over RM200mil per annum while its net gearing was only 5%.
Most of its local estates are at their prime and have been consistently producing fresh fruit bunch (FFB) at a compounded annual growth rate of 11% for the past seven years.
According to the research house, PPB Oil Palm's ambitious expansion plans will be positive for long-term earnings although turnover may be affected during the period required for planted trees to mature.
“When estates are young, yields are generally lower leading to high production cost and lower profitability. We expect it to take five to seven years before the Indonesian venture contributes significantly to PPB Oil Palm's earnings, “ it said.
The research house projects a 16% decline in PPB Oil Palm's earnings for the financial year ending Dec 31, 2005 as the expected 11% increase in FFB output will not fully offset the anticipated drop in average crude palm oil (CPO) price.
It said earnings should bounce back in the next financial year, given the expected rise in CPO price.
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