Bullish on Southern Acids


Healthy balance sheet and potential foray into property put stock back on investment radar

LOW profile Southern Acids (M) Bhd is back on analysts’ radar.

Analysts are giving the thumbs up to the integrated palm oil and healthcare-based stock given its healthy balance sheet with a net cash of RM164.2mil as at the end of March, which supports the company’s future expansion as well as dividend payments.

Southern Acids has consistently been paying a dividend of five sen per share since financial year (FY) 2009, except for FY2010 and FY2011, when it paid six sen per share.

But what makes Southern Acids an interesting stock to watch is the potential diversification into property in the foreseeable future.

A source tells StarBizWeek that Southern Acids has a 644-acre plantation land bank in Kota Kemuning, Selangor, which has the potential to be developed into a mixed property project.

“This is part of the group’s plan if the management decides to re-develop this plantation land bank into property.

“It make sense given its prime location within the premier Bandar Rimbayu township by IJM Land Bhd in Kota Kemuning. But for now, it is still status quo,” adds the source.

At the same time, Southern Acids is considering to increase its plantation land bank.

The source says this will be part of the group’s long term plan to reduce dependency on externally sourced fresh fruit bunches (FFB).

“The potential land bank ideally must be located within our palm oil mills, the acquistion price must be reasonable within the prevailing market price and financially viable to the group,” explains the source.

Strategically, the ratio of internally and externally sourced FFB must be able to optimise the profitability of the mills.

For the current financial year ending March 31, 2018 (FY2018), the group has allocated RM33.6mil in capital expenditure. Topping the list is healthcare division at RM26.4mil, oleochemicals at RM4.5mil and plantation & milling at RM2.7mil.

Southern Acids’ FY2017 financial results are its best in recent years. The group posted a net profit of RM57.3mil on the back of RM740.09mil in revenue.

RHB Investment Bank Bhd reckons Southern Acids’ small plantation area in Kota Kemuning is ripe for property development, which could create value enhancement for the group.

Should the land bank be sold or develop into property, the research unit said Southern Acids would be able to garner an additional RM700mil from it.

“This is based on a conservative value of RM25 per square feet and is more than its current RM634mil market capitalisation,” says RHB Investment Bank in its latest report.

The research unit points out that Southern Acids is an asset play as “its value lies in its assets and potential unlocking of value.”

Currently, the group has a decent sized oleochemical business, a small Sri Kota Specialist Medical Centre in Klang and a 4,622 ha of oil palm plantation land for a very inexpensive valuation.

“We believe the stock is undervalued, given its underlying asset values.

“Value unlocking is crucial and we believe Southern Acids would look to unlock the value on some of these assets if it finds a suitable merger and acquisition opportunity for its plantation wing in the form of additional land bank in Riau, Indonesia,” says RHB Investment Bank .

However, timing is the key. It warns that investors may not have the patience to wait if the unlocking of value does not occur in the foreseeable future, given that Southern Acids’ earnings base is likely to be relatively modest.

“Hence, we believe this is in management’s sights, particularly with the injection of new blood via the appointment of younger generation shareholder and managing director Dr Nick Low in 2015,” adds RHB Investment Bank.

Kenanga Research is initiating coverage on Southern Acids with an “outperform” call and a target price of RM5.35 based on sum-of-parts.

The research unit says the company’s average revenue growth would be supported by its integrated plantation operations combined with good long-term FFB growth with above-average processing margins, while the healthcare segment is on track for expansion.

Kenanga describes Southern Acids as having an integrated plantation businesses with a natural hedge.

The integrated plantation operations have historically recorded an inverse correlation between the oleochemical and plantation upstream division, as lower crude palm oil (CPO) prices on the upstream side lead to lower feedstock prices in the downstream side.

“This leads to a natural hedge against the volatility in the CPO prices thus ensuring consistent profitability for the group’s plantation businesses,” explains the research unit.

Should Southern Acids expand its plantation estates, Kenanga estimate that the group could gear up to about RM450mil (assuming net gearing of 50%) which could support the purchase of 7,100ha to 21,400ha of brownfield or greenfield area.

This could substantially boost the company’s total land bank by 1.5 times to 4.6 times to 11,700ha-26,000ha.

Should the company’s management expand its plantation land bank, Kenanga says this would be the third major land acquisition since the 5,300 ha in 2002.

On healthcare, Southern Acids currently owns and operates Sri Kota Specialist Medical Centre, its flagship 232-bed tertiary private medical centre in Klang.

Under the healthcare division’s RM26mil capex for FY2018, some RM20mil is allocated for expanding its cancer, spine and heart centres while the remaining is allocated for licenced bed expansion of about 20 beds per year through FY2019.

“We expect these expansions to contribute to the healthcare segment’s operating margin expansion trend, from 18%-23% in FY2016-FY2017 and 24% in FY2018-FY2019.”

This compares favourably with local large-scale hospital operators such as IHH Healthcare Bhd at 15% operating margin and KPJ Healthcare Bhd at 8%, according to Kenanga.

On Bursa Malaysia yesterday, Southern Acids’ share price closed unchanged at RM4.66.