Can palm oil and water mix?

  • Business
  • Saturday, 10 Jan 2015

A file picture shows a worker holding palm oil fruits at a mill in Selangor. Despite the fall in crude palm oil prices, brownfield oil palm plantation valuations will remain at current commercial price levels, according to an industry expert.

Puncak Niaga Holdings Bhd, which shareholders recently approved the disposal of its water operations and assets, is keen to dabble in the plantation industry. But the question is whether the timing is right.

Executive chairman Tan Sri Rozali Ismail (pic) had indicated that the company had its eye on several plantation estates in Malaysia.

“We have already identified a few, but now it is just looking at the valuation and the profit forecasts and also the price of investment, if it is reasonable or not,” he told reporters after the company’s EGM on Wednesday.

The EGM was called to get shareholders approval for the disposal of Puncak Niaga’s water operations and assets to the Selangor state government, bringing the latter one step closer to ending the six-year water saga.

In a bid to restructure the state’s water operations, the Selangor state government had offered RM7.65bil to take over four concessionaires namely Konsortium ABASS Sdn Bhd, Syarikat Bekalan Air Selangor Sdn Bhd (Syabas), Puncak Niaga Sdn Bhd (PNSB) and Syarikat Air Selangor Holdings Bhd (Splash).

Puncak Niaga had last November signed a sale and purchase agreement with Selangor state-owned company Kumpulan Darul Ehsan Bhd to dispose off its entire equity interest in PNSB and its 70% equity interest in Syabas for a total cash consideration of RM1.56bil.

Rozali, who is the largest shareholder in Puncak Niaga with a 40.9% stake, said of the shareholders that were present at the EGM, almost all agreed with the disposals.

The deal is to be wrapped up by Jan 16 should both parties comply with the remaining terms and conditions of the agreement.

Puncak would be giving out a RM1 per share special dividend, which would amount to a maximum of RM543.1mil. After the distribution, the company would be left with just over RM1bil to spend on future investments.

On its potential foray into the plantation sector, experts say it would ultimately depend on the valuation of the investment and potential returns.

“It doesn’t matter which industry it wants to go into as long as there are decent returns,” says an analyst.

Meanwhile, M.R. Chandran, an industry expert and consultant, says despite the fall in crude palm oil prices, brownfield oil palm plantation valuations would remain at current commercial price levels. Enterprise valuation would apply only in cases where estates are located in remote areas.

However, it is a positive factor that the company would be using cash to purchase the estates as opposed to seeking external financing, he says.

“The key valuation determining factor is the quality of the estate, i.e. the nature of the land title, location, age profile, FFB (fresh fruit bunch) yield per ha, standard of infrastructure etc. But at the moment, I can’t see anyone wanting to dispose of established plantation landbank,” he says.

He adds that Puncak Niaga should acquire at least 5,000ha to realise fair margins. “If it has access to 5,000ha or more then it would be economical for it to build a palm oil mill to process and trade CPO and palm kernel which would result in better earnings for the company compared with selling just FFB. It needs to be mindful that a sizeable landbank of about 20,000ha, which translates to 100,000 tonnes of CPO, is a must if it is planning to venture into plantation business for the long term,” he says.

Analysts from bank-backed research houses concur that Puncak Niaga will need at least 10,000ha and 20,000ha to have economies of scale.

The current average going price for plantation land price is between RM70,000 and RM80,000 per ha.

Plantations in Sabah and Sarawak would be a cheaper option compared with landbanks in Peninsular Malaysia, as the latter would command a premium of 30% to 40%, depending on locality, say analysts.

Chandran says that apart from landbank valuations, the company will also need to recruit a good management team familiar with estate operational issues.

The other critical element is the mobilisation of labour, bearing in mind that more than 75% of the current labour force in the plantation sector are foreign workers and the industry continues to face labour constraints.

“All these challenges have to be managed carefully. I do not think it is the right time for a new player to venture into plantation business but having said that, there could be some planters wanting to dispose of their estates at below market value due to management issues, poor margins etc,” he says.

He reckons that the crude oil price tumbling to below US$60 per barrel has resulted in the current cheap agro-commodity environment.

Going forward, the new normal will be lower prices for most agricultural products. Palm oil, although unique and versatile in its properties, still has to compete with 16 other oils and fats in the global market, he says.

“If they have enough cash and are able to acquire a reasonably well managed estate, then all is well,” he says.

At this stage it is unknown how much Puncak Niaga plans allocate to invest in the plantation sector.

Chandran pointed out at CIMB’s corporate day conference, that the key risks to the Malaysian palm oil industry is its stagnating CPO yield. Coupled with labour shortage issues, it could reduce plantation companies’ profit margin and cost competitiveness in the global edible oils market over time.

He projected that CPO output for Malaysia to be between 20 million tonnes and 32 million tonnes in 2015. He predicted that the average Malaysian CPO price in 2015 will be RM2,400 per tonne based on the assumptions of average crude oil price at US$75 per barrel, exchange rate of RM3.50/US$1, biodiesel mandate intact, and current gross domestic product growth of the Indian subcontinent, China and Indonesia is sustainable.

Meanwhile, Puncak Niaga also plans to expand its oil and gas (O&G) business via Puncak Niaga Oil & Gas Sdn Bhd and is currently in talks with several parties for the provision of maintenance services.

Rozali is not concerned with the fall in oil prices, as the company is not as badly affected compared with companies in the exploration and production segment of the industry.

Post disposals, the group’s O&G business will become its main contributor. It currently contributes some 30% to 40% to the group’s revenue, and is expected to increase 5% to 10% this year.

However, Rozali indicated that Puncak Niaga would still have a focus on the water business.

It plans to provide water treatment and distribution solutions to several Asean countries, leveraging on its expertise in the water, waste water and environmental engineering business.

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