PETALING JAYA: Plantation companies are expected to undergo further consolidation and merger and acquisition (M&A) activities as global demand increases for palm oil, both for food and biodiesel.
Plantation analysts concur that most plantation companies will need to strengthen their global positioning and marketing network to stay ahead in the highly competitive market.
Yesterday's offer bid by Singapore-based Wilmar International Ltd on PPB Oil Palms Bhd, a listed plantation arm of PPB Group Bhd, as well as Synergy Drive Sdn Bhd offer last month to merge three Permodalan Nassional Bhd plantation companies - Sime Darby Bhd, Golden Hope Plantations Bhd and Kumpulan Guthrie Bhd - signal a trend in future plantation consolidation and M&A activities in Malaysia.
UOB-Kay Hian Securities analyst Leow Huey Chuen said the Wilmar-PPB Oil deal was synergistic and forward looking given the encouraging prospects in the palm oil industry.
Upon completion of the merger and restructuring, Wilmar stands to be Asia's leading agribusiness group and among the largest listed companies in Singapore with a potential market capitalisation of US$7bil.
“I believe PPB Oil has been offered a fair value at RM9.046 from Wilmar,” Leow said, adding that full approval by PPB Oil shareholders would depend on the future performance of Wilmar's shares, which will resume trading on the Singapore Exchange today.
Listed in August, Wilmar has performed well over the past five months from a mere 84 cents to S$1.71 - when trading in its stock was suspended on Wednesday. The pre-suspension share price of PPB Oil was RM8.95.
Leow said PPB Oil, which would be de-listed from Bursa Malaysia, would be part of an enlarged Wilmar, which in turn will be a mega integrated plantation group. It would have the capacity to refine five million tonnes of palm oil a year, she added.
PPB Oil's 363,238ha will see Wilmar's land bank expanding to 573,238ha, of which 90% is in Indonesia.
“Based on both companies' figures as at the latest financial year-end, the combined production of fresh fruit bunches and crude palm oil (CPO) are 2.2 million tonnes and 1.1 million tonnes,” Leow added.
“This new land bank size is just slightly lower than the proposed merged entity of PNB's plantation companies with 600,000ha,” said a consultant familiar with the plantation deal.
He said the Wilmar-PPB Oil deal could likely result in the creation of the world's second largest listed oil palm plantation player after the PNB plantation companies merger.
PPB Group owns 54% of PPB Oil, according to Bloomberg data. The company started out in 1968 growing sugar cane, then expanded into flour mills and oil palm cultivation.
A Singapore-based commodity analyst said PPB Oil shareholders stood to benefit from Wilmar's dynamic growth.
“We believe there will still be an upside to Wilmar's share price,” he said.
He expects Wilmar could be a liquid proxy for the palm oil plantation sector. The catalyst to its future growth is the implementation of its first biodiesel plant in January and rising CPO prices which are expected to strengthen further on the back of growing demand for biodiesel.
“However, the key risk will be a potential EU ban on palm oil biodiesel but we believe this is unlikely as it may contravene WTO rules. There may also be some short-term profit-taking on the stock, which we would view as a buying opportunity,” he added.
Meanwhile, Goldman Sachs in a recent report said Wilmar would be the largest palm bio-diesel producer in the world, with 1.05 million tonnes per year of total biodiesel capacity, once its three plants in Indonesia started operations.
It said Wilmar's competitive advantage stemmed from its dominant position in Indonesia, where competition in the palm oil refining business was less intense than in Malaysia.
Goldman Sachs said Wilmar was well placed to make “supernormal profits” as a direct biodiesel play and to benefit from Indonesia's CPO growth. Wilmar's 40% refinery expansion would also drive volume growth of about 20% in 2007 on rising utilisation rates, it added.
Did you find this article insightful?